Depending on where you get your economic news, either the U.S. is (still) on the brink of a recession or the Federal Reserve has inflation mostly under control and the economy is poised for a banner 2023. Despite the difference of opinions economists and business leaders have about the U.S. economy, most of them would agree there is a fair amount of economic uncertainty out there.
Because of this uncertainty, blue chip companies outside of the legal industry like Amazon, Disney, Google, IBM, and Microsoft have cut hundreds of thousands of workers. Many blue chip law firms like Cooley, Davis Wright Tremaine, Goodwin, Shearman & Sterling, and Stroock followed suit, laying off attorneys and/or staff in recent months. Of course, many more law firms probably cut attorneys or staff as well, but the public will never know about it.
As if law firm leaders didn’t already have enough to worry about day to day, they must execute their strategic plans without having a sense of whether the conditions they’re facing today will be the same in six months. Will interest rates hold steady? Will the labor market shift again to being an employee’s market? Will there be significant fluctuations in the costs of doing business?
For many law firms, how they navigate today’s economic uncertainty will dictate how well-positioned they are for continued growth once the uncertainty passes, or how badly they will need a course correction at that time. Here are four strategies all law firms, regardless of their size and type, can employ to navigate and even thrive in today’s uncertain economic times.
Develop a mix of counter-cyclical practice areas
You’ve probably heard this advice before. It is the fundamental action a law firm can take to protect itself from economic uncertainty. Firms should strive to build a mix of legal practices that in the aggregate are not materially affected by economic booms and busts. Counter-cyclical areas provide stability to law firms by insulating them when the economy falters and demand for legal services changes. We often see this in large law firms where startup, financing, and transactional work slows at the same time demand balloons for commercial litigation, bankruptcy, and restructuring work. Firms that have the latter practices can wait out the economic uncertainty without taking a painful hit to their bottom lines on account of the former practices slowing down.
Though many plaintiffs’ firms are not as vulnerable to changing economic conditions as corporate firms, plaintiffs’ firms too can build their practice mix in a way that allows them to grow during times of economic uncertainty while their competitors are treading water.
For example, when the economy contracts and more employees are laid off, we often see an increase in the number of workers’ compensation and disability claims filed. That’s because employees who were working while they were injured or who otherwise qualified for these benefits may decide now is the time to take some time off, especially if they were laid off and are not eager to look for a new job requiring them to work through pain. Therefore, adding a workers’ compensation or disability practice could allow a plaintiffs’ firm to grow during a down economic time if it knew how to maximize the value of those cases and consistently bring them in through its marketing efforts.
Generally speaking, firms can add counter-cyclical practice areas by laterally hiring attorneys who practice in these areas, retraining their current attorneys and staff, or simply marketing for these cases and then referring the cases out and collecting referral fees.
Spend money to grow high-quality assets
During uncertain economic times, law firms should spend their money wisely. Part of doing so includes going through their budgets and asking if they can justify the money they’re spending on each line item. But firms also need to devote as much available money as possible to growing high-quality assets. For most firms, that means their inventory of cases and their attorneys and staff.
As for a firm’s case inventory, it can grow this asset by spending its marketing budget strategically in order to bring in new high-quality cases, and by increasing the value of current cases by investing in experts, demonstratives, life care plans, and the like.
Firms should remember that more cases don’t necessarily mean more revenue, and they certainly don’t mean more profits. For example, plaintiffs’ firms that carry 80 cases with 70 winners will bring in more revenue, and will probably be more profitable, than those firms carrying 100 cases with only 60 winners. The firms that double down on unprofitable advertising or spend money to increase the value of cases that are low-value cases no matter how you look at them, could find themselves with cash flow issues on the front end and lower revenues or profitability on the back end.
As for bringing on attorneys and staff, thanks to layoffs inside the legal industry and out, coupled with a continued focus by employees on finding a career path that fulfills them, there are many high-achieving attorneys and staff looking for new jobs these days—many of whom firms might not have been able to afford a year or two ago given the compensation demands these attorneys and staff were making then.
Some of this talent might be an improvement over the personnel law firms already have in place. Others might bring knowledge and expertise to positions firms hadn’t staffed previously, but need to in order to grow, such as positions in marketing and operations, or practice areas firms want to create or expand. And, for those firms willing to bring on fully remote attorneys or staff, they may find talent at a discount if the firms are based in metropolitan areas and the talent is not. To avoid overhiring or hiring the wrong people, firms would be wise to model out the people they may need based on their investments in marketing and their expected growth so they can grow their headcount strategically.
Take advantage of lower advertising rates or cultivate your existing client base
For the law firms that are willing and able to do so, economic uncertainty provides a rare opportunity to take advantage of the changed advertising supply and demand equation. With many advertisers temporarily reducing their budgets or eliminating them entirely, the cost to advertise will decrease—perhaps significantly—as media companies scramble to fill their newly unclaimed inventory. This allows law firms to get more bang for their advertising buck. Additionally, media companies may be more willing to lock in long-term deals with law firms that are unusually favorable to those firms because the media companies will be concerned that the reduced demand will continue for some time.
Firms that are not able or willing to maintain or increase their advertising spend should cultivate their existing client base for new matters. A firm’s current clients are a captive audience that presumably likes the firm, trusts the firm’s attorneys and staff, and would work with them in the future. Because of this relationship, firms should periodically review their clients’ files, understand the possible additional legal matters they could face, and educate the clients about the ways their firm can help them with those legal matters. A workers’ compensation client might have a third-party personal injury claim. A plaintiff in a mass tort might also qualify for Social Security Disability benefits. And in corporate law firms, a litigation client could have an ongoing and unmet compliance need.
Sophisticated, business-focused firms are already doing this no matter the economic conditions. They’ve trained their attorneys and staff to periodically review clients’ files to mine them for potential new matters. These firms understand that the next client matter they bring in the door doesn’t have to come from the next phone call, networking event, or website inquiry from a prospect. During uncertain economic times, all firms should embrace that philosophy.
Understand the impact interest rates have on your firm’s operations
Rising interest rates have increased the cost of debt, which has been a tool law firms have increasingly relied on to finance their cases and their growth. When interest rates were low, debt was a smart way to finance experts, investigators, focus groups, digital advertising, and even payroll to free up cash for other uses. But with the federal funds rate quadrupling over the past year or so, it is now more expensive to finance operations with debt. This affects firms in several ways.
For one, plaintiffs’ firms working on a contingency-fee basis could face financial hardship. These firms usually float cases, bearing all the costs and fees of litigating the case from generation through completion. Most firms use debt to finance these costs and recoup their investments only upon successfully resolving a case. Low interest rates meant firms could finance and carry more cases, but clogged dockets have kept many cases from going to trial within the customary two-year window. Facing tight cash flows, some firms had to contemplate settling clients’ cases for values lower than what they could secure if they invested more in those cases. Meanwhile, rising interest rates increase the costs of a firm floating its expenses, which reduces a firm’s proportional recovery of a client’s matter—if it resolves the matter favorably.
Additionally, all firms will need to reexamine the expenses they have been paying for with debt to determine whether it still makes sense to do so—or to even incur those expenses in the first place. Is the firm getting the return on investment from those expenses that will allow it to eat the increased cost of financing them with debt? If not, do the expenses bring other benefits to the firm that justify its continued incurring of them? If so, can the firm eliminate other expenses to fund them?
Also, firms that do not have supplemental sources of cash flow when their cases are not getting resolved fast enough to fund their operations, or that are not bringing enough new matters in the door, may have to use debt no matter how high interest rates are. Knowing that this increased expense might be around the corner, it will behoove firms to speed up their strategic planning to unlock new sources of cash flow before they’re forced to incur (more) debt carrying relatively high interest rates.
Finally, firms will need to wring out as much efficiency as possible from their people, their technology, and their marketing because they may decide they don’t want to use debt to fund new investments in these areas. Some firms might be pleasantly surprised by the growth opportunities staring back at them by asking more out of the resources they have in these areas. Other firms might be in for a rude awakening when they find they have assembled attorneys, staff, technology, and processes that cannot rise to the occasion when economic conditions require them to do so.
Strategic approaches to a trying time for law firm leaders
Even the most successful law firms, however you define “successful,” are run and staffed by human beings who are not immune to the anxiety and stress brought about by economic uncertainty. History is littered with the names of law firms that went under when they did not adjust to how economic conditions challenged their established ways of doing business.
While every law firm is different, many firms would be well-served by considering the above four strategies as they maneuver through the current period of economic uncertainty. Doing so will position them for success both during the current economic cloud cover and when the sun shines again.
Shawn Lehocky is the chief executive officer of Pond Lehocky Giordano LLP. Bryan Reilly is the firm’s chief financial officer. They can be reached at email@example.com and firstname.lastname@example.org, respectively.
Reprinted with permission from the March 21, 2023 edition of The Legal Intelligencer © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.