Yes, it is true that recessions can be scary. But they are also inevitable for any business owner so it’s best to prepare for them. Smart law firm owners will take action now to make sure their firms are ready for economic downtowns so that they not only survive, but thrive.
In this final installment of our series examining the opportunity that recessions present for law firms, we will build on the action steps we have outlined earlier in our blog series. (Part 1) (Part 2) (Part 3)
7 – Find the Right Metrics – You Can’t Manage What You Can’t Measure
It’s now table stakes to apply business intelligence tools and data analysis to your law firm. Like every other industry, KPIs (Key Performance Indicators) are a necessary component of your management toolkit. But the trick is, to find the right KPIs to evaluate the long-term health of your business in an ever-changing world.
And for many of you, the old KPIs may no longer work. For example, many firms evaluate their economic health based upon billable hours. However, in a recession, most firms will see the deterioration of the realization rate at which clients pay outstanding invoices. To this end, billable hours are a strong proxy for productivity, however, they no longer may be a reliable basis upon which to evaluate the underlying strength of your business model. Similarly, accounts receivable (AR) may begin to age faster and become less collectible than historical averages.
It’s my experience that measuring revenue, realization rates, and AR aging are the primary metrics to monitor and evaluate if your law firm’s underlying financial fundamentals are beginning to deteriorate. Of course, you need to pay attention to your cost structure and expenses. However, as we’ve discussed before, saving your way to profit in a law firm is a very difficult thing. Evaluating top line revenue and trends associated with the willingness and ability of your clients to pay are the foundation upon which to do a deeper dive.
8 – Managing Inflation
It’s been nearly 50 years since the law industry faced an inflationary environment like the one we have today, and that leaves us in somewhat uncharted territory. Most of us have legal representation agreements that contemplate adjustment of our fee structures on an annual basis. And many of the largest clients in the world have forced us to sign riders that may prohibit, or severely limit, our ability to raise hourly rates. While we’re all hopeful that inflation will continue to subside, there is great uncertainty. Thus, one of the things I recommend doing, is building at least the optionality of raising your rates on more than an annual basis.
Similarly, the interest rate which you charge your clients on outstanding receivables has never been an important component in law firm management. That seems to be changing. The longer receivables stay outstanding, the less they are worth when they are ultimately paid (assuming they are paid). Hence, you should give your engagement agreement a thorough review to determine whether or not it needs updating in light of current economic circumstances.
9 – Market More (Smarter) Not Less
Being on the verge of an economic downtown is NOT the time to stop marketing. Unless you were wasting your marketing dollars in a good economy, you need to keep marketing your firm in a downturn.
First, evaluate your current marketing efforts. What channels, platforms, content and messaging are helping you manage your firm’s brand and driving more business? How much of your marketing investment is being wasted on “things you’ve always done” that are not proving fruitful? Spend some time understanding where your marketing efforts are proving successful and where you’re wasting money. Always be sure to ask new clients how or where they heard about your firm. For those marketing areas that are working, think about increasing some of your budget spend there or shifting some of your lost budget from non-performing channels and into the ones that are working. Sometimes more doesn’t mean an increase, sometimes it means trimming some of the fat to be more efficient with your marketing investments.
Second, come up with a plan to strategically touch base with your existing clients. Capture the voice of your clients. Learn about the challenges that they are facing in their businesses. Issue spot and look for opportunities to service the legal needs they may be facing in the months or years to come. This can also be a good opportunity to gain intel on any challenges they may have to pay you in the months ahead. Be sure to review the array of services your firm offers and make sure they know you should always be their first point of contact whenever a new legal issue comes up. Connecting with your clients can also help you focus on that aspect of your practice that your clients really like, appreciate and are willing to pay more for.
Next, continue to market to potential new clients. You’ve likely invested a lot of time and money to build a marketing machine to fuel the growth of your firm. Just because we’re likely entering an economic downturn does not mean this is the time to turn that machine off. Be sure to carefully monitor your marketing spend and assess if changes are needed. Don’t spend good money on bad marketing efforts or marketing channels that aren’t performing.
It’s also important to continue to touch base with the referral network that you’ve built. Reach out to those centers of influence in your network to make sure they know the strength of your firm and all the ways your team can help them and their clients with legal issues during the downturn. Again, you always want to be top of mind for anyone in your network when they or someone they know encounters a legal problem.
Continue your work to build your own professional reputation and also your firm’s brand. Look for opportunities to highlight everything you’re doing to support existing clients and new clients with challenges they’re facing during a recession. If you added new practice areas or new team members with certain areas of expertise, be sure to market those new service offerings so that people who follow your brand know the full scope of your firm’s power.
I am fully aware that all of this marketing work can take a great deal of time. Some of these tasks may not be the best use of your own personal time. That’s why it’s critical to keep in mind that there are an array of outsourcing options when it comes to law firm marketing such as delegating website maintenance, blog creation, social media, and SEO.
You Will Be Fine!
If you can shift your perspective to see an economic downturn as an opportunity, you will make your firm stronger. This moment is a chance to improve or reinvent your business model, to lower your overhead, to increase your billable hours or leverage other revenue models, all while working smarter instead of harder.
Ready to explore hiring options that can power your firm without adding to your overhead? Book a demo to talk an expert on our team.