Small Firms Can Survive, Even Thrive Amid Turmoil

Upheaval is the new normal for law firms of any size, and many observers wonder if the sole and small-firm practitioner will survive that kind of current and future turmoil.

But there is considerable potential for smaller firms to thrive by serving the "99 percent" of our society, the small to mid-size businesses and individuals whose legal concerns will undoubtedly endure.

The fundamentals of the law-firm business model for serving them will remain the same: marketing (secure and maintain clients), production (do legal work efficiently and effectively) and collection (get clients to pay); however, many factors that affect these fundamentals are changing rapidly.

New competition, new technology and new billing pressures are creating a new cost-benefit dynamic that defines the small firm's three-dimensional future.

• Marketing and competition — In the 99-percent world of today, a firm's competition is not just the other law firms in the Yellow Pages. Competition now comes from "onshore" legal staffing companies that hire lawyers in lower-cost areas in the U.S. and pay them less compensation for repetitive work, as well as the many "do-it-yourself" websites purporting to offer advice, research and forms in such areas as family law, probate and patent filing, among others.

  Against that kind of competition, the successful firm must market by adopting technology to reduce cost.

• Production and technology — So what kind of technology impacts the production function? The real need is not cost-cutting; it is efficiency. And that means using technology as a competitive tool — not just for word processing, but in areas such as case management and document analysis for discovery. Using software for those tasks is a must. It reduces overall legal cost — not the lawyer's hourly rate — and affords savings to the client.

• Collections and realization — Collections (and, consequently, cash flow) are impacted by the heightened competition for reduced-price services. Small firms must fixate on their realization rate. Low realization remains the biggest financial problem for most lawyers. Failure to maintain at least a 95-percent realization rate means that, even as the firm pays expenses at 100 cents on the dollar, it is earning less. That is lost cash flow, and it can lead to disaster.

The antidote is to abandon a strict, across-the-board hourly rate. Being able to maintain billings while becoming more efficient requires changing the billing system to embrace alternative fee arrangements. Using contingent, fixed, capped, value-fee approaches under which time is not the relevant issue is essential to make the most of the leverage from technology.

The fundamental survival equation for small firms and solos remains: get the work, do the work, get paid for the work. Business schools call that marketing, production and finance. Every business needs them.

The small firm that adopts the three-dimensional efficiencies will enhance its ability to be more efficient and professional in serving the client. That is the path to survival in the new-normal legal services environment.