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There’s an aphorism that a rising tide lifts all boats. A receding tide, on the other hand, only grounds the unprepared. So how prepared is your law practice for the economic downturn, if not outright recession, that’s upon us?
Predictions look dire for all types of businesses, including law practices, in the coming year. And even if you work within the confines of a larger, financially secure firm, your individual practice is a business within a business and could be hit. Some will undoubtedly struggle, and others disappear entirely. But take heart—industrious and well-prepared law practices can actually thrive. Here are steps that all lawyers can take to protect their personal profitability in the downturn.
Get tough on the numbers. The first step to maintaining personal profitability is to do a disciplined review of your most critical performance indicators. Naturally, you want to analyze past performance-oriented data, especially for billable hours, effective hourly rates and realization rates. However, thriving in tough economic times also requires understanding the numbers that help predict future performance. This means you need to analyze your business development pipeline and create a “dashboard” of key metrics that you can read at a glance to assess what’s coming. You can then see potential trouble spots months in advance and act accordingly.
Do you, for example, know the relationship between hits on your Web site each week and calls to your firm within the following 10 business days? How many of those calls become initial consultations in the 10 days after that? How many of those consultations will turn into actual client engagements within the following 10 days? If you don’t track these types of metrics, it’s far more difficult—if not impossible—to identify upcoming challenges.
You wouldn’t drive a car without a dashboard, would you?
Make the hard decisions fast. Sometimes looking at the key metrics leads to the unhappy but inescapable conclusion that you need to cut costs. For most law practices, salaries comprise the largest line item on the budget, so to reduce costs significantly, you may need to reduce staff. Nobody likes to fire people—but it is an occasionally necessary part of running a business. If you avoid making the hard decisions about cost cutting, you can put your entire practice in jeopardy.
Two additional quick points on the topic: (1) if you have to do it, do it fast; and (2) don’t do it lightly. Your remaining staff will remember for years to come the decisions you are making now, so demonstrate the kind of leadership you want discussed around the water cooler.
Take a new look at your market. Recessions don’t just hit law firms, of course. They hit your clients and their businesses and lives just as hard, which can cause traditionally strong areas of your practice to dry up suddenly. If you look closely, though, you may also see new opportunities in unexpected places.
For example, with less disposable income in consumers’ pockets, restaurants are bracing for lean times; under the same conditions, supermarkets are preparing for increased revenues owing to more cooking at home. It’s akin to a business application of the First Law of Thermodynamics: -Opportunities are neither created nor destroyed, only changed in form.
Adapt. If you do spy a new opportunity within or adjacent to your practice area but lack the knowledge or marketing to capitalize on it, don’t be afraid to retool. Invest some time in developing technical competence and market penetration in that potentially lucrative new arena. Identifying opportunities is only half the battle, after all—you also have to adapt to the opportunities to reap the benefits. Facebook, one of the darlings of the social networking scene, was originally conceived as a site only for Harvard undergraduates but now boasts more than 80 million active users. Considering there are only around 6,700 Harvard undergrads, it’s clear that somewhere along the line Facebook spied a market opportunity and took the steps to adapt to and capitalize on it. Tough times are a good time to make that a model in your law practice.
Start now. To paraphrase an old Chinese proverb, it’s a good idea to dig a well before you are thirsty. So even if you are not yet feeling a pinch from the downturn, start preparing now, beginning with an uncompromising look at your key metrics. It could mean the difference between minor cost cutting and cutting staff. Analyze your marketplace early and you may be among the first to discover a new opportunity. Adapt quickly to that opportunity and you just may move to the front of the line for an exciting new practice niche and revenue stream.
Or just keep doing what you’ve always done. But a final word of caution: When a tide recedes, it’s not the boats that put out to sea that get grounded. It’s the ones that are anchored too close to shore.