Playing the Long Game: Four Lessons From Past Crises
THOMAS E. PIERCE, CPA
COVID-19 is a novel coronavirus, but economic downturns are nothing new. As the world continues to adapt to the pandemic’s repercussions, law firms can turn to past economic crises for some lessons about what they might expect and how they might capitalize.
- Some Practice Areas Heat Up
When the economy falters, litigation, restructuring and mergers and acquisitions historically see significant upticks. You might suspect that transactional work would drop off, but that is not necessarily the case. Market swings, governmental stimulus packages and regulatory adjustments can drive transactions. It may pay off to invest in building or expanding your firm’s capabilities in one or more of these areas.
- Existing Trends Accelerate
Long-term trends generally do not evaporate due to economic problems; instead, they pick up speed. For example, continuing cost pressures and a more mobile workforce had some firms thinking about reducing their footprints before the pandemic, and such reductions could become more pressing. Similarly, competition from alternative legal service providers and pressure from alternative fee arrangements could affect staffing. The commoditization of legal services from the clients’ perspective, as well as their cost-consciousness in a tight economy, might mean an even greater focus on pricing.
- Pricing Discipline is Essential
That said, resist the temptation to slash prices. Such moves often come back to haunt law firms. For example, avoid offering discounts unless you stand to benefit from, say, a guaranteed volume of work. Also, do not extend discounts to delinquent clients simply to get cash flowing. It sets a precedent that encourages clients to delay payment in the future.
- Client Communications Matter
Regular communication with clients always is vital, but this is especially true during uncertain times. Reassuring communication can strengthen relationships and improve client retention. Partners should reach out to the most important clients, whether in person or by videoconferencing. Practice groups should send timely client advisories on relevant issues. It is a good time to survey clients on how you can better serve them. You will show your concern and, ideally, identify some opportunities to proactively respond to their needs.
Maintain two visions
You may feel overwhelmed dealing with short-term issues, such as cash flow, but do not take your eye off of the future. The decisions you make today can lay the foundation for long-term sustainability — or undermine it.
How Law Firms Can Move Forward Profitably
JOY A. LONG
2020 has been a year to remember — and it is not over yet. In this year of uncertainty, law firms and their management have had to wrestle with the issue of profitability. And, while law firms cannot control the economics resulting from the COVID-19 pandemic and the financial shutdown of the country, along with the upcoming presidential election, this blog highlights a few ways that law firm leaders can take control of their firms’ profitability.
Take Control of Your Law Firm’s Finances
Poor billing, receivables and payables management can hinder profitability. Delays in issuing invoices and collections often lead to costly write-offs and write-downs. Law firm leaders need to work with their management to streamline the process. Consider pre-billing your clients for major expenses, such as expert witnesses, depositions and travel. Then, bill clients as soon as a matter is completed, regardless of the result, as well as appropriate milestones (for example, after a successful pretrial motion). These types of changes should be part of the firm’s policy and should be communicated with all lawyers and staff, as well as reinforced by leadership.
When clients submit their payments, process them immediately, making daily deposits, rather than letting payments stack up. If your clients delay in paying their bills, follow set schedules for following up with them. You might cite quarterly and year-end bank reporting as a reason to reach out on delinquent payments. Consider offering one-time discounts as incentives for clients to satisfy aged receivables and encourage payment by credit card. Look at the feasibility of adding a payment link to your website to make payment processing easy and seamless.
As for payables, schedule your payments close to the due dates so that the firm benefits from any early payment discounts without transferring funds early. If they are available without additional fees, take advantage of deferred payment options. And, regularly ask vendors if it is possible to negotiate lower prices. If they are resistant, then perhaps it is time for management to look for competing vendors willing to work with the firm. It never hurts to go out to bid.
Related Read: Cost-Cutting for Sustainability: Three Areas to Target
Get to Know Your Clients
Existing clients can offer you more work, but they may also be a drag on your profitability. Know the difference.
Cross-Sell to Existing Clients
The long-held axiom that it is easier and more cost-effective to generate new work from an existing client than it is to land an entirely new client still rings true today. This is where cross-selling comes into play. Train your lawyers to listen and recognize when clients might need additional services so that they can make introductions to other lawyers in the firm. Give your lawyers a primer on your firm’s services and industry specialties to help them identify cross-selling opportunities. Some lawyers may be resistant to sharing their clients, so explain the benefits of cross-selling for the firm and, ultimately, for their own bottom lines. The firm may need to retool its messaging to the “one firm, one team” approach, which may involve internal marketing and business development training to overcome resistance. You also might try tying cross-selling to compensation, which may require you to rework your compensation system.
Consider Reducing Your Number of Clients
While this idea may seem counterintuitive, every firm has clients who take up time and resources without returning profits that justify such expenditures. Establish a firmwide policy that will not allow lawyers to take on clients’ unprofitable matters in the hopes that they will bring you work that makes it all worthwhile later.
Instead, focus on having fewer, but more profitable clients. Creating a team to work with a handful of larger clients with continuing and numerous matters can develop a deeper understanding of your clients’ needs. This can lead to lucrative cross-selling opportunities, as well as a stronger sense of teamwork with the client and within your firm. You will also likely reduce costs related to client acquisition.
Ways to Cut Costs
One of the easiest ways to improve profitability is to reduce your costs. For example, alternative staffing arrangements, such as flex-time, part-time or temporary attorney arrangements can all result in lower staffing costs. Such options can give firms access to top-notch attorneys who are not necessarily interested in the traditional partnership track without some of the costs associated with full-time lawyers.
Outsource non-attorney services such as accounting. Another area to consider is technology. Software, cloud services and other new technologies provide a wealth of options for increasing productivity, improving practice management and saving time on standardized tasks and forms.
Law firms that specialize in specific practice areas often see greater profits than those that take a more scattershot approach. Attorneys and paralegals who specialize in an area generally work more efficiently and effectively, producing high-quality work at a greater pace and for higher fees. Even small firms can benefit from dividing legal work by practice area.
Finally, review your compensation models. It may be time to move away from fixed salary compensation and incorporate a variable pay component based on outcomes and achievements. Again, consider tying a percentage of compensation to cross-selling to encourage behaviors that the firm wants to promote. Changes to benefits also can cut costs. For example, consider increasing health insurance deductibles and employee portions of premiums.
The Time to Start is Now
Keeping your firm profitable is an ongoing process. Implementing the ideas in this blog is a good place to start. If you want your firm to move ahead in 2021, you need to plan how to grow profitability now.