By Nina Cunningham, Ph.D., Senior Advisor
As law firms and other businesses reel from the disruptions experienced in the marketplace since the Pandemic lockdown in March 2020, alternate business processes and tech transitions with AI have begun to travel at warp speed. The early disruptions continue to affect every aspect of commercial, industrial, and professional life. “No kidding,” most of our readers will say. While the paths taken shed little light on where things will settle, the answer may reside in the multiple paths law firms take as some lead and others follow the boldest among them.
As law firms and other businesses reel from the disruptions experienced in the marketplace since the Pandemic lockdown in March 2020, alternate business processes and tech transitions with AI have begun to travel at warp speed. The early disruptions continue to affect every aspect of commercial, industrial, and professional life. “No kidding,” most of our readers will say. While the paths taken shed little light on where things will settle, the answer may reside in the multiple paths law firms take as some lead and others follow the boldest among them.
It is hard to imagine a definition of risk under these circumstances that would suggest risk can be avoided. Law firms have tried to manage the moving workplace, develop remote applications, and hire and promote at a distance. They have introduced and tried to perfect remote client services, accumulate data for AI, thus creating innovative responses to legal, marketing, and administrative demands.
Having benefited from the high level of demand for legal services since early 2020, law firms perform now much as they did in the past: doing well even if clients did poorly. Large firms as well as boutiques are in demand based on their ability to serve clients across a broad spectrum of practice areas. This factor motivates expansion.
As management strives to get control and take the right steps, continued risk from geopolitical turmoil and economic disarray leave firms faced with persistent uncertainty. Seeking action, it is worth identifying risks that can be addressed from proven experience. Among these are reducing costs and delivering efficiencies.
Why are these efforts so frequently overlooked or deliberately avoided?
Amid reports that there was a hiring binge among law firms in 2021, speculation rose both as to why it happened and what actions might follow if firms face a decline in demand for services. We are moving into a third year post-Lockdown. In my own survey of firms, there are multiple directions being taken with most eyes on what the leading firms are doing. Expansion seems to be a common response to uncertainty. This follows the call to hope for the best, but be prepared for anything.
According to an article by Aebra Coe in the June 20, 2022 issue of Law360, the 400 largest law firms boosted their headcount by an average of 3% in 2021, with the 200 largest increasing by 5.6%. Did that mean they were leaving the effects of the slowdown behind?
The competition for legal talent follows anticipation that demand for legal services largely remains high. Uncertainty and its accompanying complexity also incline the market for legal services to remain high, getting back to the point that law firms do well in good times for clients as well as in bad.
Brad Hildebrandt observed that 2020 and 2021 were outliers in most respects, both from the hiring standpoint and the management changes required to serve clients at an optimal level. In general, he suggests that hiring in 2020 and 2021 balanced each other out.
There is no suggested conclusion in the Law360 reference about what will happen, but uncontrollable risks, largely external to the firm, may actually increase the demand for legal services. But the article addresses what firms might do if demand reverses.
Dan Safran, Unbiased Consulting‘s CEO, suggests in the article that a downturn in business could leave law firms stuck with high payroll costs and nowhere to turn but to increase billing rates. He suggests clients may turn to lower cost remedies for solving business problems and disputes. The experience of Dan and the Unbiased Consulting team teaches that without the pain of reduced demand, law firms will remain reluctant to make investments in efficiencies which allow firms to do more with less investment. This might be their big mistake.
Clients who perceive the need may adjust to higher billing rates, just as the rest of us accommodate inflation in other items. The test of Dan’s forewarning about increasing rates will be in the real level of client retention and growth.
Does this mean that cost reduction and improvements in efficiencies are not worthwhile?
A state of panic at business downturn is never good. This could backfire on expansion for law firms who respond with drastic cuts in legal staff. The headlines around cost-cutting attached to people are never good. Personnel cuts always hurt both the reputation of the firm and their ability to rehire if business rebounds. A more reasonable move if risk is present would be to address costs discretely by line item and increase strategies for managing waste. Thirty years of consulting experience reveal that law firm management cannot afford the drift from focus on the day-to-day affairs of the firm to undertake that move.
Despite information about law firm expansion, it is not clear whether increased staffing was meant to meet existing demand or the anticipation of demand when the Pandemic is declared over. I would suggest that firms are not sure what to anticipate and want to be prepared. They will look for signs that calm the prevailing winds of uncertainty and serve increased demand as long as it is there.
Our experience at Unbiased Consulting is that it always makes sense to address waste and inefficiency as a continuous process, driving down uncertainty and worried speculation around the demand for legal services. In other words, these actions allow firms to be prepared either way.
There are formulas for managing all kinds of costs, but a caveat remains if an organization plans to grow. The costs of hiring and training are very high. If firms hire in anticipation of growth and growth does not happen or actually reverses, it is costly to give up those seats and recapture the investment if and when recovery takes place. Having to play catch-up with hiring impedes growth when face-to-face with client opportunities. If growth is industry-wide, competition will be strong and meeting demand will be urgent.
As Dan also notes, law firms experiencing good times and looking to grow and innovate may not be inclined to hire strategic consultants to do such mundane things as analyze line-item costs or restructure the supply side of law firm management.
But experience reveals that this may be the best way to reduce risk. It makes sense to hire those who can quickly identify opportunities, target the right fields, and recommend solutions that offer significant upside both immediately and in the longer term. Many of these consulting services are offered on a contingency basis for which it is easy to see value on the bottom line. If firms and consultants define the objectives at the onset, a direction of this type serves a prime objective: overcoming the threat of drowning in costs if business shrinks or is driven to areas unforeseen.
Regardless of how periodically it is done, costs should be reviewed regularly. They often include opportunities overlooked but can reserve cash for the longer term without sacrificing the human resources necessary for growth when things turn around.
Turning around is a concerted effort. While hope is necessary to have the incentive to turn things around, hope is not enough. Frequent cost and management reviews allow firms to stay ahead of a crisis. Reviewing agreements, evaluating boring details, planning ahead for project or contract renewals, and moving to alternative services where appropriate all will pay off. Most firms have large investments that can be addressed by those who fully understand those costs and can quickly develop a strategy for addressing them.
Since law firms often express their growth in the number of new lawyers added to shore up their knowledge base, they can avoid burdensome costs by assigning new hires to longer term market trends that can help grow revenue and avoid crises that result in layoffs. In the meantime, addressing other areas of cost reduction increases efficiencies at the level of client service.
With the right approach, consultant strategies will not take time or effort from firm leadership, as they begin by knowing what to look for. At Unbiased Consulting, our confidence is in quickly identifying and describing the issues and details, proposing a solution, and returning results. We offer a free evaluation and an estimate of the potential benefit returned to the bottom line. We do all the work ourselves, also transferring what we learn to shore up the data of the firm. Our role is to relieve the firm of developing strategies and taking action, but also meeting the challenge of delivering the same or better provider services to the firm in a framework that is faster, better, cheaper.
Conclusion
Risk management is no longer just about insurance programs or policies to cover cybersecurity or floods. It extends to the broader categories of risk that affect us right now. We do not have to know when things will get better or worse in order to achieve cost reduction or efficiency improvement. But we do not want to realize the risk before attacking it. The risks of cost increases and inefficiencies are always present.
Analyzing costs by their effect on quality and not merely on the bottom line will provide much needed justification for the practical decisions law firms have to make in purchasing goods and services and reviewing management policies. They should take the leap.
For more information about Unbiased Consulting, contact Nina Cunningham at ncunningham@unbiasedconsulting.com Dan Safran at dsafran@unbiasedconsulting.com
_______
Nina Cunningham, Ph.D., is an affiliate of Altman Weil, Inc., and President and CEO, Quidlibet Research Inc., a global strategic management firm. She serves as a Senior Advisor and subject matter expert with Unbiased Consulting.