Managing the delicate balance of law firm economics has always been a challenge. In serving any particular market (practice type and geography), firms struggle to find that sweet spot — the perfect formula of rates/pricing, productivity, cost, and resulting profits. Should any one of the particulars get far out of equilibrium, the consequences can be stressful

For the majority of law firms, one of the most significant areas of cost is office space. As a result of COVID, firms closing offices and adjusting to working from home, many firms are considering whether there is an opportunity for a triple win — to decrease costs and make positive strides on issues related to satisfaction in the workplace while maintaining or even improving productivity.

 There are a growing number of examples of firms seizing this opportunity. This article’s title sums up the state of thinking pretty well — COVID-19 Shutdowns Have Law Firms Wondering How Much Real Estate They Really Need.

 Another good example of the evolving thinking is reflected in this quote from senior partner Louis Miller of Miller Barondess “Even after our office opens up,” Miller said, “I’m going to make it optional. (The firm’s attorneys) don’t have to come in if they don’t want to. As long as they do the work, I don’t care where they are.” (Read this  interesting article here). The same is true in cities throughout the country.

 The impact of firms rethinking their space needs is reflected in the sharp decline in law firm office leasing. According to this article, New York City law firm office space leasing is down 45% from last year as firms defer leasing decisions while they contemplate how to respond to COVID-19 challenges.

 Some firms have taken decisive action, downsizing their space commitment. In the process, we know of several firms who have been proactive in renegotiating their lease as they decrease their commitment to space (see Burnham Brown restructuring to 20% less pace and Greenspoon Marker Shrinks Footprint…) while others are still considering their space options.

The issue of how much office space is actually required for service providers is not new, or unique to law firms. The public accounting profession has operated with a different and more efficient space model for many years. As firms realize that their space needs aren’t what they once thought they were, options like hoteling, shared offices and working at home permanently are being and should be considered.

 What are your firm’s plans for space?

As talk about more states allowing non-lawyer ownership of law firms is heard, concern over more deeply capitalized competition may be on the mind of some law firm leaders.  No doubt, opening up law firm capital structures to investors is significant, but it won’t change the fundamentals for surviving in today’s legal services market.  Since time immemorial law firms have had to compete for business.  Regardless of a new kind of competitor on the horizon, firms will continue to enjoy success if they focus on service, value, and client needs.

Because service, value, and client needs are table stakes, new entrants to the legal services market will confront the same kind of client expectations law firms do today.  For that reason, overreacting to new ownership may be a distraction.  Rather, law firm leaders should stay clear-headed about what matters and refocus on providing better client service, more value and meeting client needs.

In its In-House Counsel Q&A from September 15, 2020, Thomson Reuters Legal Executive Institute detailed the preferences of one sophisticated legal services consumer.  The deputy general counsel in question said that outside lawyers should (ii) provide practical and business-oriented advice, (ii) be a reliable trusted advisor that can make life easier, and (iii) communicate well.  While there are many ways to meet these requirements, three recommendations come to mind.

Understand the Client’s Business.  Whether keen to provide practical and business-oriented advice or seeking to make a client’s life easier, a thorough understanding of the client’s business is essential.  Digging deep into the client’s business is a fundamental precursor to meeting the first two requirements identified in the Thomson Reuters’ piece.  And because having the ability to communicate articulately and succinctly is also highly valued, knowledge about the client’s business will greatly enhance communication skills.  Think fluency in the client’s business.

Broaden the Partnership (No Weak Links on the Team).  An appreciation of the client’s business must be present in all team members that work for the client, not just the client relationship manager.  When the firm’s appreciation for the client’s business is deep and wide, the client will sense it at every interaction. Moreover, if all team members are thinking about the client’s business, you’ve created an incubator of beneficial ideas.  Big dividends will follow.

Avoid Being Insular (Consider Best Practices).  No one has a lock on knowing how to meet client needs.  Some of your competitors or other industry players may be more effective because they do things your firm does not do. Conversely, the latest client service fad may not be a “best practice” and may advance the ball little.  So, while you look around, consider success stories and reject failed experiments. After alternative practices are vetted, adapt the winning ones to your service model.

New law firm ownership rules (if they come) can be exciting, scary, and different.  But managing your firm through a possible new age does not change the need to earn your clients’ trust and help them achieve their goals.  Will you keep your eye on the ball?

The impact of COVID-19 on law firms has barely begun. When it comes to the flow of work, some firms are experiencing a measurable or even significant bump thanks to having the right practice focus at the right time: but for the most part, law firms have experienced some degree of decline in both work and collections.

How firms have responded to the negative impact has been mixed. Some have found ways to hold the line on employment and compensation. Others have implemented furloughs, lay-offs, and compensation reductions.

But all signs point to the fact that we’ve barely weathered the initial shock.

As the reality of longer-term damage to demand becomes clearer, there are increasing signs that in response to the market, firms are downsizing. The following is a sub-set of the numerous announcements during the last week:

  • Skadden is latest firm to announce layoffs; experts say more…
  • Layoffs Hit Two AmLaw 100 Firms
  • Nixon Peabody Lays Off Some Furloughed Workers…
  • Baker McKenzie to Cut North American Workforce as COVID…
  • Layoffs Come to Cleary Gottlieb

An Appropriate Response

The prospect of downsizing any organization is daunting. The impact on individuals and families is impossible to calculate or plan for and is often tragic.

Yet, as law firm leaders around the world are examining options, the question is when are layoffs the appropriate response to economic realities.

At one end of the spectrum, firm leadership has a duty to clients and partners to do what is necessary to ensure continuing viability. Failure to act soon enough could result in even more pain for many more people.

The discussion isn’t legitimate, however, without looking at the other end of the spectrum. Leaders have a responsibility to each and every person that is part of their law firm. Any decision to downsize, which is driven by the pressure, or a need, to deliver as much income as possible to firm owners is to completely ignore the degree to which every individual in the firm has contributed to any success.

Equity ownership in any endeavor carries with it implicit risk as well as a potential reward.

For owners who have accepted this reality, the challenge comes in identifying the point at which some level of economic impact becomes a threat to institutional existence. Possessing this level of insight requires access to real-time measures and a commitment to manage this reality.

The answer as to what to do is going to vary from firm to firm. It warrants planning that, if not already in motion, should begin today. It not only depends on the data noted above but must include substantial input from firm owners.

I have been inspired by accounts from within our industry where leaders have brought creative thinking to bare on this discussion and have crafted innovative responses to the moment, and in the process, have rallied everyone in pursuit of the other side of this challenge. It requires a vision that sees beyond the end of this year.

An Effective Path to a Decision

The questions of when and how to deal with the possibility of layoffs speak to who and what a firm is. A quiet but broad-based discussion with owners to determine common objectives and values, what varying approaches to the moment might cost, and precisely what that existential moment looks like is an effective way to come to a position that reflects a firm’s real culture.

How is your firm preparing to answer this critical question?

For some time, law firms have felt heightened competition from not just other law firms, but also from clients moving needs in-house and alternative service providers picking off peripheral services.  As reported by Bloomberg Law in Arizona First State to Allow Nonlawyer Co-Ownership of Law Firms, looming rule or legislative changes in a number of states may boost significantly ASPs ability to compete with traditional law firms, and not just on the margins.

It is too early to predict how much pressure law firms will feel from these changes.  Nor can it be predicted whether expanded rights for ASPs will make legal services for Americans more accessible.  Yet given the relative prominence ASPs have in the legal landscape already, it is reasonable to predict that future ASP competition will be more formidable than ever.  Indeed, ASPs creative use of impending changes could be breathtaking.

Guiding traditional firms in this potentially altered industry requires leaders to redouble their attention on management principles, strategic planning and talent retention and procurement.

What should be done?  At a high level, three things come to mind:

Look Inward.              With all that has happened in 2020, no doubt most firms have taken stock of where they stand.  Don’t stop, do it some more, but with ASP intrusion in mind. Focus on internal changes that can add greater efficiency (and quality) to the delivery of legal services.  You know that is what the ASPs will be doing and touting to your clients.

Look Outward.           What does your legal service market look like? Is more ASP competition likely (is your state sprinting towards ASP expansion or dragging its feet), is your firm already finding it hard to compete, or does it have a leg up on existing competition.  Even if this review is positive, realize that the impact of ASPs will be felt eventually.

Look Ahead.               If ASPs are likely to descend into your market like never before, what is your challenge and how do you meet it?  Or are you on the cusp of a “if I can’t beat them join them” moment? There is a fork in the road-will you turn right, left, or follow Yogi Berra’s advice and “take it?”

With the advent of this change, what are your strengths internally and externally?  Assessing them in the context of a looming marketplace disruption can highlight a responsive path forward. But business as usual, without thoughtful reflection on these impactful developments, just won’t do.

In response to the pandemic many law firms reduced the pay of owners, associates and staff. Many of these moves were made specifically to avoid layoffs while managing the uncertainty associated with future cash flow.

During the last six months firms have adapted to a new way of operating and the feared decline in revenues has been less than expected for many.

As daily operating income begins to stabilize and performance appears more predictable, we’re seeing firms begin to restore some of the previous reductions. Indications are that many firms are proportionally restoring compensation levels for all impacted personnel. For example, if they had previously reduced pay by 20% they are restoring half or 10% of the salary across the board.

One firm announced the decision to restore staff and associate compensation to pre-pandemic levels. But, here is the interesting thing, the firm is leaving the partner pay-cuts in place. This announcement by Crowell & Moring struck me as special. It reminded me of many lessons learned from Simon Sineks Leaders Eat Last. The partners of Crowell &has Moring are sending a  strong message, the associate and staff personnel of Crowell & Morning are valued. The partners are going to take care of them before restoring their own pay.

Culture takes on a lot of different looks and this statement by an international law firm tells us  that they value their
people.

How has your firm responded to the pandemic?

Well run law firms annually set aside time to plan for year-end activities and decisions.  In addition to using institutional processes, systems and experience to wrap up the successful (hopefully) year, most firms use that time to plan for the coming year.  Like clockwork, important decisions for the firm’s present and future have often been decided in routine fashion.

But 2020 and the looming 2021 are not like other years, and reliance on tried and true planning regimens and topics may be insufficient now.  Indeed, finishing out 2020 and planning for 2021 requires a fresh look at annual planning—a look that is best addressed now rather than waiting for late fall to scramble.

Making plans for year-end planning now requires leaders to add to the year-end agenda new topics driven by practice modifications forced by the pandemic.  While each firm’s issues will be different, the following topics are a non-exclusive list of subjects that might need to be addressed when the firm’s planning begins in earnest.

Client Relationship/service   Have your relationships with clients and how you serve them changed significantly?

Personnel Levels        Has the mix and number of people at the firm changed?

Space Requirements  Does a changed business model reduce your commitment to real estate?

Remote Working Policies      Do your remote working policies preserve your firm’s culture and help keep your talent?

Compensation Adjustments  Have already implemented compensation changes worked or are other changes needed?

Technology Investment         Is greater investment in technology required in light of the changed law firm model?

In Office Working Policies      Do your policies for working in the office make sense in a remote leaning world, and are they sufficiently safe?

Cash-flow and borrowing needs       Have the changes to your world required modifications to your finances, or are more needed?

Interim vs. Permanent Changes        Of all the above changes already made, which of them are temporary and which will be permanent?

The 2020 changes to the legal services market require a different kind of planning for 2021.  It requires a more thoughtful approach—one that considers whether changes made this year will be interim or permanent.  Are you ready for that kind of planning?

Virtually every day, the news includes reports of additional law firm closures, layoffs, and compensation reductions.

What is driving these decisions, and what does it mean for your firm?

Without question, catching any developing problem early makes it easier and less traumatic to take appropriate action, increases confidence in management, and enhances the likelihood of achieving real stability.

With early recognition of critical issues as the objective, here are seven early warning metrics. Smart leadership is always keeping an eye on these, but each is worthy of extra attention in today’s marketplace.

Decline in Relative Production

Productivity ebbs and flows in any market and proactive management is always seeking ways to prevent dips. But when historically predictable dips turn into unprecedented declines, this is symptomatic of a deeper issue and is rarely the kind of normal fluctuations a firm has planned for. It is time to take note.

Increased Turnover

The movement of talent has become a characteristic of the industry. An abrupt loss of key contributors, often beginning with an individual or small group, may hint at decreasing confidence in a firm’s prospects. In the worst case, it may foreshadow mass departures.

Loss of Clients

This one is so obvious that it seems elementary to point it out. But it is surprising how often a firm finds ways to reason away a client’s decision to align with another firm. Proactive client communication should catch it before the fact, but the loss of clients is almost always about more than the impact on revenue. 

Tough Credit Terms

Decreasing dependence on a line of credit is, for some, part of a strategic approach to cash management. Still, if lenders are becoming more demanding and terms are less viable, the reliance on credit is an indication that resource management is misaligned with reality.

Falling Realization

We all know this. Quoted standard rates are meaningless if what is ultimately collected doesn’t cover the cost of doing business. Every firm should have a crystal-clear understanding of what must be realized in order to be profitable. As realization tumbles closer to that known minimum, the market is sending you a warning.

 Increased Reliance on Debt

This is closely related to realizing stricter credit terms. But plenty of firms were still able to negotiate attractive terms right up to a month or a quarter before they faced closure. If debt is funding operations or draws, it is past time to rethink operations.

Increase in Receivable Age

It can be caused by a number of realities, but when the payment of invoices takes longer and longer, it is likely to snowball. More credit is necessary. Credit terms become less tolerable. To collect there may be a temptation to discount value, and so on.

.If any of these early warning signs occur, now is the time to develop and implement responsive solutions.

Firms that respond early have a much greater record of successful management of the transitional issues related to these challenges.

In the turmoil caused by Covid-19, many law firms have had to adjust to unforeseen circumstances.  News stories tell the sad tale of law firms being adversely impacted.  Some firms have closed, and unfortunately others will follow.

With one firm’s demise comes opportunity for others.  Clearly, personnel leaving the firm in wind-down must find homes and for them, only the best is wished.  An equally dynamic opportunity exists for law firms surviving the pandemic.  For those firms, the added talent in the market provides a chance to add substantive and financial strength.

Firms considering adding this talent that should consider two things before jumping on the chance to add from a burgeoning talent pool.

First, the firm should consider whether the apparent financial strength associated with the candidate(s) is compatible with the firm’s long-term strategy and aspirations.  A short-term shot in the arm from a business generator may divert a firm from fulfilling its articulated vision of its future.  Focus on the future is important and should not be abandoned.  A careful review of the opportunity, with all its implications on the future, is required.

Second, any candidate to be added must be evaluated in the context of the firm’s existing culture.  Time and again, surveys and anecdotal evidence have shown that law firms have reason to place high value on preserving firm culture.  A good and sound culture can help a firm through good and bad times.  Any addition that undermines your firm’s culture will be regretted later. Evaluating the cultural impact is essential.

In these times, opportunity knocks.  But unless a firm is convinced its long-term financial strength and culture won’t suffer, the door should remain closed.

The headlines are beginning to paint a pretty clear picture: many law firms worldwide are taking more aggressive action in response to their COVID related economic challenges.

As part of an effort to create a cash buffer to weather current or anticipated pressure brought about by the virus, firms are focusing on containing revenue loss while decreasing cash outflow.

To decrease costs, firms are addressing three areas:

  1. Space,
  2. People
  3. General operating expenses

Space

For the last two decades law firms have been modestly but consistently trending to a smaller space footprint. The trend has been driven by a combination of technology-related capabilities and efficiencies, economic realities, and changes in work styles. Recent experiences, thanks in large part to “stay-at-home” orders and decisions to remain socially distant, have created a heightened awareness of how much less space law firms actually need to operate.

 We’re seeing firms proactively explore options as it relates to significantly reducing the fixed costs associated with physical space.

 People

Given that compensation and benefits represent a significant percentage of a typical law firm‘s costs, it was not surprising to see firms enact furloughs, temporary compensation reductions, conversions to part-time schedules, and the suspend of hiring initiatives. As the dust begins to settle, we’re witnessing many of these moves morph into permanent changes.

  General expenses

More and more reports are finding their way into the news, reflecting an increasing focus on overall expense reduction and investment deferral. The prevailing attitude seems to be, “if we don’t have to do it right now, let’s not.”

Closing

A June 25, article in the ABAJournal had an interesting summary of actions being taken by law firms. The material includes results of a recent Altman Weil survey, which further describes the changing mindset of law firm leaders. I recommend it.

 The fact is that wise law firm leaders are taking steps today that are designed to cushion the impact of further decline. There is no single template for addressing uncertainty, so the challenge is to accurately analyze options and develop a strategic approach to the next six, eighteen, and twenty-four months that is consistent with your firm’s vision and the shared aspirations of your partners.

What is your firm doing?

Covid-19 has upended law firm normalcy.  What might have been perceived last March as a couple of month hiatus from business as usual has been extended with no end in sight.  With no known end date, it can be difficult to plan in ways previously thought routine.

The current Covid-19 world for law firms can be felt in matters of employee health, reduced client demand, depleted inventory, declining revenues, and external pressures from banks, landlords and vendors.  Dealing with this panoply of challenges requires leadership that can identify solutions uniquely suited to the circumstances.

Beyond addressing the crisis du jour, two firm initiatives can help “hold the fort” until normalcy returns.

First, as my colleague Roger Hayse noted in his Client Revenue Loss and Covid-19, staying in touch with clients by establishing a listening program can prove beneficial.  Keeping and enhancing existing client relationships through a frequent-touch listening program shows clients you fundamentally care about them and postures your firm well for the future.  When the legal services industry reopens, having a stockpile of nurtured relationships is better than having to find new ones.

Second, a law firm’s success is inexorably tied to the talent it has.  Firms that lose talent in these Covid-19 times may miss the competitive edge needed when normalcy returns. For that reason, frequently communicating with your talent to bind them to the firm is critically important.  Firms may even see value in touching base with talent lost through furloughs or lay-offs.  Covid-19 has not changed the fact that law firms are in the talent business and always will be.

When it comes to clients and talent, a law firm slowed by Covid-19 should not slow down.