There’s no denying that recessions can produce negative consequences, however, that’s for the economy as a whole. It’s been well demonstrated that during recessions the strongest expand their market share, acquire talent, and prepare for economic recovery. Similarly, recessions provide you an opportunity to look holistically at your business, your business model, and make overdue changes.
We’ve already established that recessions are a normal part of a market economy and that they present tremendous opportunities for nimble law firm owners. (PART I)
We’ve also presented some initial steps to prepare your firm for a likely economic downtown. (PART 2). These included evaluating working capital, your expenses and your team.
Now let’s dig into a more actionable steps you can take now to make sure your firm is well positioned.
4 – Evaluate Your Clients
It may seem counterintuitive, but the next step in recession proofing your law firm is to evaluate your client base. You may need to drop some clients if they become too much of a credit risk to your firm. Regrettably, many of them will not survive the coming recession. Some of them might be real estate developers, some of them might be engaged in business that requires a low cost of capital, or some of them may simply have found their way to you because they aren’t the best business operators.
When economic conditions deteriorate, you may no longer have the ability to extend the same levels of credit to your clients. Are they a slow pay? Are they a no pay? Regardless of how well they’ve done in the past, you need to run a tighter ship and pay attention to their creditworthiness. Banks are tightening credit, your vendors are tightening credit, you are not immune to this type of business analysis. It may be time to increase the size of your retainers for both new and existing clients. Among the best advice I have ever received is that you are not your clients’ bank. If they need credit, they need to find It elsewhere.
Similarly, do you have too many of the same types of clients? Do you have too many retailers? Do you have too many developers? In short, consider if you have too many of the types of clients who will have more difficulty weathering even a mild economic downturn. If so, it’s time to reevaluate your client base to make sure you have a diversified client base that will be able to not only survive a recession, but be able to pay your bills.
In addition to evaluating their economic health, you should look at your clients and evaluate what their future needs might be. Their historical work may have been real estate focused, but will that turn into future litigation and/or bankruptcy work? Do you have the tools in place to provide the type of services they will need going forward, and if not, how do you get ahead of that problem?
5 – Reevaluate Your Business Model, Move Away from the Billable Hour
Lawyers have had a love/hate relationship with the billable hour for decades. Even in the best of times, renting your time and charging by the 1/10 of an hour isn’t the best business model. Use this opportunity to improve that model. Selling your time will make you a good living, but it’s unlikely to make you wealthy. And during a recession it’s a disfavored model to your clients. They want certainty and predictability. And you want to cut your exposure to the credit risk of your clients not paying.
Flat Fees, hybrid fees, subscription fees and success fees are better, even more so in a recession. The billable hour as the dominant model for the business of law dates back only 75 years (for an interesting history of the billable hour click HERE), but legal markets are evolving. At the time it was adopted, the billable hour was the best proxy for measuring value. But that was a different world – one in which the output of labor was traditionally measured by time (think the output of a factory worker). However, we live in a much different world today, a world of leverage (and I don’t mean financial leverage). Today’s world of leverage is made available because of technology, broad markets, and specialization. Each of these forces allows forward thinking lawyers to look to alternative pricing models to improve their law firm’s profits.
For litigators, the answer has long been to measure value on a contingency basis. But for a growing number of other practice areas, it’s becoming possible for lawyers to leverage their intellectual capital to improve the bottom line. Real estate lawyers are turning to flat fees to capitalize on their cutting edge from banks. Transactional lawyers are increasingly using hybrid success fees. Corporate lawyers are incorporating subscription models.
The common thread among these models is the ability to measure value to the client in a way that isn’t based upon time. And while there is no one size fits all model for your practice and your firm, find a way to avoid measuring your output as a timekeeper. Instead, find or create a business model that leverages your individual knowledge and work product in a way that compensates you for the value you drive to your clients not the hours you work.
6 – Make Your Cost Structure Variable
It’s just common sense that when entering a recession you want to lower your cost structure without limiting your ability to produce revenue. And for a law firm, that means wages and employees. At most firms, the percentage of revenue allocated to wages is between 65% to80%. This means, to have a meaningful impact on your firm’s profitability, you will have to manage your employee expenses.
To manage these traditionally fixed costs, you must evolve and adapt. You need to be flexible and nimble to stay competitive, yet you need the resources to meet your clients’ needs or they will go down the street to a competitor. To meet these competing demands, thousands of law firms rely upon LAWCLERK.
LAWCLERK has become the place where busy lawyers go to get work done. Whether you need help with a one-off contract, brief, or research memo, or something more long term like a remote associate, LAWCLERK was built to give you the tools you need, to get more work done and produce more billable hours, all while reducing your overhead. Similarly, LAWCLERK allows you to tap into subject matter expertise to meet your clients’ evolving needs.
It’s likely your needs are going to change in the coming year. Perhaps you’ll need more bankruptcy support, or perhaps your docket of litigation will expand. Regardless of your needs, finding the right talent is critical in maintaining your business and your competitive edge. And LAWCLERK has thousands of lawyers with exactly the skill set you’re looking for.
Ready to get started and explore hiring options? Book a demo to talk an expert on our team.
Don’t forget to subscribe to our blog so you don’t miss the last installment in this series. Or if you’d like to learn more on this topic you can download a copy of our Recession Proofing Your Law Firm Guide.