Recent years have been good for law firms of all kinds and sizes. But good days can’t last forever. Whether the next downturn hurting law firms gets traced to a world-wide virus, political disruption, or just a plain old recession, it doesn’t really matter. What matters for law firms having to ride the looming bumpy road is whether they can respond when the inevitable downturn hits.
In any downturn cycle, there are law firms that are winners, survivors and, unfortunately, losers. Where your law firm ultimately finds itself in that spectrum does not reflect on its innate goodness, quality of work, or dedication to the finest tenets of the profession. Rather, winners, survivors and losers experience different consequences because they are positioned for a path not anticipated. Making that path a favorable one depends not just on their existing profiles, but also on the way they prepare those profiles for an uncertain future.
Based on past experiences, five things will play a big part in deciding your firm’s fate:
Financial Strength. The foundation for surviving any downturn is financial strength. A firm whose current success is built on strong financial principles, solid attorney productivity, and reward systems that motivate positive performance should do well in good times, but also in a downturn. Conversely, a firm whose financial strength is based more on recent infusions of talent through lateral hires or mergers may be less strong than seemed. Because financial strength is so important in any recession, understanding your firm’s financial ecosystem is critical.
Operational Flexibility. In any downturn, cash flow can become constricted, so preserving liquidity by eliminating discretionary items, unproductive people, and excess real estate can be important. While cutting back on some of these items can be achievable to a degree, paring back on long-term liabilities like real estate leases may prove more challenging. This can be particularly true for a firm that has recently grown with the addition of multiple offices and the incurrence of long-term obligations. For the firm facing potential inadequate operational flexibility, a review of its long-term commitments is an important first step.
Culture. As the Great Recession showed, firms that survived owed no small thanks to solid and cohesive cultures in which key contributors stayed calm by taking long-term views. Shaky cultures, especially ones built primarily on compensation or aggressive growth, heightened the risk of failure. When challenges arise in the next recession, will your firm’s culture stimulate votes in favor of firm or self? Assessing the kind of culture present at your firm is useful when thinking about the next downturn.
Leadership. Steady and experienced leadership is an important element to surviving a downturn. Does your firm have respected and trusted leaders who have exhibited sound judgment? Or are your leadership young, inexperienced and/or untested in crisis? The profile of your firm’s leadership says a lot about how it may fare in the next recession. Working with green leadership today to build experience, demonstrate sound judgment and instill trust and confidence is an important step before crisis erupts.
Preparation. No matter how your firm’s financial strength, operational flexibility, culture or leadership stack up, preparing now while things are good is critical for conquering the next recession. Because there is always room to improve, shoring up these four elements is essential while other eyes at the firm remain fixed on the good times. By preparing now, it will be far easier to confront recession when it comes.
Where your firm sits today and where leadership takes it prior to the next downturn will help decide your firm’s future. Firms whose profiles are suspect and not improved prior to the next recession have a future directed towards struggle if not disaster. Other firms, blessed with solid profiles or vigilant about improving them, likely will not only survive but may be positioned for opportunity. As you enjoy your current success, have you thought about where on the spectrum your firm will fall in the next recession?