“Hope is not a strategy”
– Various –
It seems like déjà vu all over again; demand for law firm services is down, but many law firm leaders expect their firm to see an increase in demand. Based on those expectation hiring and purchasing decisions are made. Unfortunately and to their surprise and disappointment demand fails to reach hoped for thresholds. Year after year, firm after firm.
This post from a couple of weeks ago by Gabe Friedman does an excellent job of describing this cycle of optimism to disappointment. His post is supported by a Citi Private Bank report which details the optimistic tendencies of law firm leaders. Gabe’s post concludes with a stark truth “….positive bias doesn’t translate into real improvements.” Or said another way hope is not a strategy.
A better way forward
The vast majority of law firms outside of the AMLAW top 50 possess more than enough capacity right now to support an unlikely increase in demand. As opposed to hoping demand will reach unrealistic levels and spending as if that is a sure thing, most firms would be better served to make two assumptions:
- Demand for their services in the foreseeable future will be flat to falling
- Rate pressures associated with their work will continue to grow
With those two assumptions in hand, two areas might be targeted for a strategy that may well yield economic improvement:
- Develop means by which to increase margins
- Enhance the quality and effectiveness of service delivery
To increase margin is a matter of increasing the spread between the compensation cost per billed hour and the collected rate per hour for the firm’s billing personnel. The analysis is really relatively simple but for those interested in a more sophisticated approach, other direct and indirect cost can be allocated to the person whose margin is being analyzed.
However the calculation is approached, the objective is to identify means by which the spread might be increased. For most firms the approach to increasing margin has been to increase billing rates. If you’ve taken this approach you likely know that rate increases are meeting ever-increasing marketplace resistance. The more difficult but productive focus is to decrease the cost associated with the delivery of services. This potentially includes staffing work with less expensive lawyers/paralegals, decreasing other types of outlays, and/or using technology to drive down the cost of services.
The most under-utilized means of determining how services can be improved is communication with clients. There are a host of options available in seeking your client’s input on how they can be better served by your firm. Surveys, whether internally or externally executed, can provide quality input. But, the most effective approach is a routine direct conversation with your client. As relationships build, clients will happily help you identify means of better serving them.
There is some chance that the above suggested demand and rate assumptions will be wrong. Your firm may in fact find itself with a sustainable increase in demand. Should demand consistently outstrip your firm’s capacity to perform the work, there is a market saturated with excess talent ready to help you address the issue.