Ignore the new reality at your peril

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Published 07/21/2010

Slowly, in fits and starts, it appears that the economy is recovering and lawyers are beginning to feel a bit more upbeat about the future.

That future may not be as rosy as the immediate past (before 2008), but it no longer appears to be total doom and gloom.

Did law firms learn any lessons from the Great Recession, or will they go back to business as usual?

Many large and even mid-sized firms for years had assumed that high associate salaries, million-dollar partner draws, rising rates and leveraged mergers with other firms would continue indefinitely. That was a fallacy; what is the new reality?

That will be hard to say. Cuts have been made, expenses have been reduced, some billing practices have been modified, and recruiting and other firm policies have been altered. Reversion to the past will not be immediate. The brake pedal will not be released quickly.

But attitudes may begin to change, and the temptation to go back to old habits may well return if the economy improves and clients become more passive. That would be a great waste of a crisis.

Poor business management has killed large and small law firms alike during the past three years. If surviving firms expect the good times to roll again, they must heed the following lessons:

  • Firms cannot indiscriminately add lawyers without regard for demand. The law school hiring lockstep should become a thing of the past.

  • Firms cannot pay compensation out of scale with what clients will accept. New, lower associate pay scales and partner compensation tied to performance should become the norm.

  • Firms cannot indiscriminately pursue mergers with each other. Combining law firms should be done only to enhance synergies and eliminate redundancies.

  • Firms cannot automatically raise rates. The billable hour may not be dead, but alternative billing is here to stay and the casualty in the process is unilateral rate increases

  • Firms cannot try to grow without a clear client development strategy. The only practical focus should be on profitable clients with the most desirable work.

  • Firms cannot ignore budgeting. Budgets define successful business planning, and any business can and should operate according to a budget.

  • Firms cannot ignore technology, but rather must use it to reduce labor (and legal costs) to leverage lawyers’ per unit fees.

  • Firms cannot put a premium on offices, as the virtual practice of law has made physical locations less important.

  • Firms cannot be banks for their clients as millions of dollars in unpaid receivables sit on their books. Enforcing the engagement agreement is essential.

As owners of their firms, lawyers need to realize that they have a responsibility and commitment to their firm’s success. That personal commitment takes the law firm out of the realm of industries like autos and banking, where churning out cars and mortgages without regard to value and worth led to overshoot, collapse and layoffs.

If law firms cannot learn from this experience, they may yet suffer the same fate.

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