A 3-D View of Small Firm Success

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The legal profession has reached a point where upheaval is the "new normal." Certainly large law firms are changing in response to recession, technology and client demands; those firms that don't change quickly enough, like Dewey & LeBoeuf, are doomed to swift failure.

Some wonder if the sole and small firm practitioner will survive this kind of turmoil.

The answer is that although big law firms serve the "1 percent" of the corporate world, there is enormous potential for solos and small firms to thrive by serving the "99 percent" of our society. These firms focus on small to mid-size businesses and individuals, and the volume and fundamental nature of their legal matters and issues will continue as long as people need lawyers. There will be substantial work available for those smaller firms that are attentive enough to their clients and flexible enough in their business processes to be competitive.

In this environment, the three fundamentals of the law firm business model will remain the same: marketing (securing and retaining clients), production (doing legal work efficiently and effectively) and finance (collecting clients' billings). However, many factors that affect these fundamentals are changing rapidly.

Marketing and competition

An oversupply of lawyers, with aging attorneys working longer and law schools cranking out 40,000 graduates a year, has impacted the marketing function of every smaller firm. Of course, small firms and solo practices are no strangers to survival-of-the-fittest competition – the average American lawyer makes far less than six figures a year. But there are wider marketing implications for the smaller firm.

In the "99 percent" world of today, a firm's competition is not just the other law firms in the Yellow Pages. It includes elements like "onshore" legal staffing companies that hire lawyers in lower-cost areas in the U.S. and pay them less compensation for repetitive work, which is provided through a virtual online relationship. There are also the many "do-it-yourself" websites purporting to offer advice, research and forms in such areas as family law, probate, real estate closings and even filing a patent.

Against this kind of competition, the successful firm must market by adopting technology to reduce costs, and then passing those savings on to the client.

A detailed consideration of technology's application to the production function shows what the successful smaller firm of the future must do. Clients continue to demand cost efficiencies, but these can no longer be had by cutting overhead – whether that means people or infrastructure. After years of recession, there is not that much left to cut. The real need is not cost-cutting, it is efficiency. And that means using technology as a competitive tool.

This is a trend well-advanced in litigation. Even many smaller firms use case management software, and now new e-discovery software can analyze documents required for litigation discovery in a fraction of the time for a fraction of the cost when compared to using lawyers for the task. Profitability for the firm comes from swiftly analyzing the millions of equivalent paper pages that electronic documents represent.

This is the model for the future production function. It reduces overall legal cost, not the lawyer's hourly rate. Some or all of this cost reduction can be given to clients as savings. The law firm that does so will be able to work out billing alternatives that make such saving profitable as it eliminates inefficiencies, duplications and unnecessary services. The leverage from technology is the small firm's production advantage.

Collections and realization

It is inevitable that collections and thus cash flow will be impacted by the heightened competition for reduced price services, so small firms must fixate on their realization rate. Low realization remains the biggest financial problem for most lawyers. Failure to have a 95 percent realization rate means that, even as the firm pays expenses at 100 cents on the dollar, it is earning less. This is lost cash flow, and it leads to disaster if it continues.

Striving to get paid quickly for the work that has already been done requires ongoing emphasis on the firm's receivables. Being able to maintain billings while becoming more efficient requires changing the billing system to embrace alternative fee arrangements. Using contingent, fixed, capped or value fee approaches is essential to make the most of the leverage from technology. The premise of any such billing system is that time is not the relevant issue to determine the fee – demonstrating value to the client, as the client defines it, is the key to ensuring that client pays promptly.

Survival equation

Here is the fundamental survival equation for small firms and solos: get the work; do the work; get paid for the work. In other words, market for new clients, produce the work and reap the profits. Business schools call this marketing, production and finance. Every business needs them.

Running a law firm in a business-like way improves professionalism. The purpose is not simply to get more money for the lawyer; it also benefits the client because a law firm run as a business approaches client service more efficiently in many ways beyond the balance sheet – returning phone calls promptly, creating and adhering to a budget, providing sufficient details on clients' invoices, and so on. A professional service business cannot succeed in the "new normal" until it understands this. Begin putting these principles to work today – or suffer the consequences.

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