One firm's recession is another's depression

Published on: 
Published on 3/2/09

Most lawyers and law firms (along with everyone else) would like to forget 2008. Yet there's no indication that 2009 will be better, and it may well be worse. When The Wall Street Journal can run a front page story (as it did in mid-January) titled "Recession Batters Law Firms, Triggering Layoffs, Closings," it definitely indicates a high level of concern.

Certainly law firms are not immune from the economic woes and financial crises experienced by the rest of the economy. The impact, however, is one of degree.

At the largest law firms, a few highly publicized layoffs of associates and staff, and several firm dissolutions, have gotten major headlines.

Even so, the pain being felt by the major firms as institutions is not that bad. Layoffs, delaying the start date of recently hired graduates, or cutting high partner compensation by 20 percent, may be novel to these firms but are not huge in economic impact.

The real pain today is being felt by the vast majority of the nation's 1 million-plus lawyers who are sole practitioners or members of small firms. Fifty percent of these lawyers earn less than $100,000 a year. In California, by far the most populous state, one-quarter of all lawyers earn $50,000 a year or less, and the situation is similar in many other states.

These lawyers can ill-afford a large reduction in compensation. They generally represent individual clients and small businesses. That type of business involves personal injury, family disputes, criminal defense and personal debtor claims, among others, that tend to pay less to begin with.

Couple this with the reduction in the number of clients and number of matters and the slower payments that are inescapable from recession, and the financial and economic difficulties most lawyers face are substantial.

For these firms, the survival equation is simple: profits equal revenue minus expenses. When recession cuts revenue, cutting expenses is the most feasible way to preserve profitability. The largest expenses for small and mid-size law firms are people, facilities and insurance, but these cannot easily be reduced.

Facilities often are on longer-term leases, and they reflect the lawyers' personalities and wishes as well as the nature of the client represented by the law firm.

Malpractice insurance contracts are written on an annual basis, and moving from one carrier to another should be done with great care to assure that prior acts are covered.

And the danger in cutting people is that it leaves the firm weaker when business turns up, as it inevitably will.

Law firms can be more efficient and economical, but should be wary of cutting indiscriminately. Ultimately the best advice is to increase revenue - get more clients.

Look to technology for cost savings. Implement education programs to make staff and attorneys more effective at client service. Create teams of lawyers and staff and charge them with the goal of making their practice area more efficient and more effective. This will cause both increased revenue from happier clients as well as decreased costs of operation.

All of this takes time and effort, but it can keep a recession, which is when other people lose their jobs, from becoming a depression, which is when you lose your own.

This Coach’s Corner Article is listed under the following categories: