Get Down to Business: Strategies to Manage in a Down Economy
By Edward Poll
Law firms are not immune from the recent economic woes and financial crises
experienced by the rest of the economy. The impact, however, is definitely
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 by 20 percent the compensation of partners already earning more
than a million dollars a year may be novel to these firms, but is not huge
in economic impact.
The Real “Hurt”
The real “hurt” today is being felt by the vast majority
of the nation’s one million-plus lawyers who are sole practitioners
or members of small firms. Experts say, and the experience of
most of us confirms, that the recent Big Law profits-per-partner
figures are irrelevant to most legal professionals. The average
American lawyer is self-employed or working at a small firm,
and makes $60,000 to $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're not at the top of the pack to begin with, and 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 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.
The Response Equation
The first response by most lawyers in the face of this challenge
is to cut expenses. Nondiscretionary spending (payment of debt
obligations, utilities, and taxes) is mandatory. Anything else
can be considered discretionary spending—overhead is
the common term. Overhead can be reduced (however painfully)
if necessary. But this is only part of the equation. In every
business, profits equal revenue minus expenses: P = R – E.
Profits can be increased by raising revenues as well as by
cutting expenses. Revenue enhancement needn’t mean a
higher billing rate, new clients or more time billed— all
hard to come by in a down economy. Key revenue enhancing strategies
include value billing and greater client responsiveness. They
can be combined with expense reductions to create an effective
plan for managing in a down economy.
It should be noted in this context, however, that expense reductions
are limited without affecting the ability of the organization
to survive. Increasing revenue, on the other hand, has no limits.
Cutting Expenses
- Office Space: A firm should consider what it can
afford, which features are most critical to operations, and
what it is obligated to in the lease. The firm that is not
locked into its current space and terms and is considering
something less expensive should remember that virtually everything
can be negotiated before signing the papers. Tenant improvements
and betterments (TIBs) can be made to the space and paid for
by the landlord if negotiated. Depending on market conditions,
a firm may be able to negotiate one or several months rent-free
as an inducement to signing a new lease. Know your market,
and check to see what other law firms have done.
- Staffing. Lawyers and law firms need people, but
they need not be full-time hires given today’s outsourcing
options. Firms can hire virtual assistants—independent
paralegals or other administrative specialists who work offsite
and online, creating work product to the lawyer’s specifications
and tailored to the law firm’s practice. Using the Internet
to outsource transcription, research, and other functions to
regions where the use of English is widespread (such as India,
the Caribbean, and Ireland) can reduce costs significantly.
- Technology. New computers, software, and database
research services are significant overhead costs. In a down
economy firms should look hard at the necessity to buy or update
technology because of the high up-front expense. Particularly
for new solo practices, substantial spending on new computer
hardware and software may simply not be possible. Use a refurbished
laptop or PC, rather than a new one, or skip Microsoft Office
and Outlook, and go with open source software and a free email
management program. Do research at a courthouse or law school
library rather than by using an expensive online research service.
- Marketing. Marketing is essential when the economy
slows, but the expense should be managed. A good strategy to
reduce marketing overhead is to make a list of five things
the firm does to market itself in the order of what brings
in the most clients or referrals. The list might encompass,
in order: 1) networking, 2) seminars, 3) website, 4) advertising,
and 5) a PR firm. Once the ranking is complete, cross the bottom
two off the list and put marketing money into the top three
performers—the ones with the most bang for the buck and
that often involve the kind of personal contact that costs
little, but is priceless.
Enhancing Revenues
- Collections. Don’t let billable hours become
uncollected cash. Bounced checks, failure to receive timely
or full payment, or client insolvency can ultimately bankrupt
a law firm. Firms cause their own collection problems by failing
to establish collection policies, to explain the policies from
the start of an engagement, and to enforce those policies consistently
during the engagement. Review accounts receivable once a week,
determine which clients are behind on their payments, and give
them weekly reminders that they owe money. Don’t let
collections slip. On average, a bill that is more than 60 days
past due can still be collected about 89 percent of the time.
However, that drops to a 67 percent likelihood of collection
after six months, and to a 45 percent likelihood after one
year. Promptly identifying the laggards is essential.
- Discounting. Firms should resist discounting fees
just to get paid, particularly if the client has earlier agreed
to pay the full amount in the engagement letter. In such instances,
tell clients that unless they honor the agreement that they
accepted and signed, the firm will, under Rule 1.16 of the
Code, discontinue work for them and seek to enforce collection
of all billed fees outstanding. If the client is worth retaining
but is having temporary payment problems, offer a discount
for everything to date, with the proviso that all subsequent
work will be billed and collected according to the fee agreement.
Get full acknowledgement of both the discount acceptance and
the future adherence to the fee agreement.
- Cash Management. There are steps that any firm can
take to get cash receipts sooner. For example, send bills on
the 25th day of each month rather than the 1st day of the next
month; because most people pay their bills on or about the
1st, a bill received after that is often not paid until the
following month. Another idea is to bill one-fourth of the
alphabet each week. That way the firm receives money from one-fourth
of all clients weekly, rather than once per month. Technology
can also be an ally in getting cash receipts quicker. Strategies
include emailing bills to clients as PDF files (which cannot
be modified by the recipient), using an electronic invoicing
service, or accepting credit card payments.
- Retraining. Earlier we touched on staff costs as
an area for overhead reduction. However, avoid cutting too
deeply. It will likely cause a problem when the economy recovers
and client demand picks up. Productivity experts estimate that
termination costs can equal 30 percent to 50 percent of the
annual salary of entry-level employees and up to 400 percent
for high-level employees like lawyers, because termination
eliminates the investment originally made to recruit and train
the person. Consider transferring people to practice areas
that are still growing. These are presumably good lawyers and
staff (otherwise they shouldn’t have been hired) and
should be able to learn new skills. By eliminating both the
cost of hiring new lawyers and the risk of failure to meet
future demand, retention can enhance revenue.
“The Business of Law”®
Strategies for cutting expenses and enhancing revenue in a down
economy are fundamental to “The Business of Law”®— a
concept that too many lawyers still resist. The operation of the
firm must be understood as a business that depends on billings,
collections, profits, and revenue. Running a law firm in a businesslike
way improves professionalism. It encourages approaching client
service more efficiently—creating and adhering to a budget,
stating clear payment and collection terms, providing sufficient
details on clients’ invoices, and so forth. All law firms
must provide value to their clients. And they must be profitable
in order to open their doors the following day. The firms whose
attorneys understand these two truths will be able to manage in
a down economy successfully while ensuring their long-term future
and success
Ed Poll works with lawyers to increase their profitability and effectiveness. To find out more about increasing revenue and net profits, becoming more effective with clients, and becoming more efficient in the delivery of legal services, contact Ed at (800) 837-5880; edpoll@lawbiz.com; www.lawbiz.com; and www.lawbizblog.com.
© Copyright 2009, American
Bar Association.
