Q. Bill, my small firm represents middle-class families and small business owners, including a few builders. As the economy and the home foreclosure crisis have worsened, our business has slowed down. What should we be doing in response?
A. It is not surprising that families who are facing home foreclosure or whose home equity has vanished can no longer afford to hire lawyers. As the real estate crisis expands from subprime housing loans to conventional loans, the foreclosure outlook has experts increasingly worried. This is a nationwide problem affecting every segment of the economy, including lawyers—unless they’re practicing bankruptcy law. Recently released U.S. Bankruptcy Court data shows that bankruptcies rose to nearly 1 million in the 12 months ending on June 30, 2008—with the number of individuals and businesses filing for bankruptcy protection up 28.9 percent over the previous year.
And it’s not just the little guys who are in trouble. According to a recent USA Today article, 71 public companies with more than $75.8 billion in assets have filed for bankruptcy so far in 2008. That compares to $70.5 billion for all of 2007, and only 22.3 billion for all of 2006. These statistics could spell trouble for all kinds of law firms, including larger ones, and a number of strategies for dealing with the challenges are given in Law Practice’s September issue (especially in Ed Flitton’s thought-provoking article on “Riding the Economic Roller Coaster”).
For more perspective specific to your small firm’s situation, I spoke with Kenneth Baker, a solo who practices in a suburb of Portland, Oregon, and Tom Grella, managing partner of a 23-lawyer firm in Asheville, North Carolina.
Balancing the Client’s and the Firm’s Needs
Ken Baker has been practicing law for more than 35 years and served as a state senator in Oregon. He and I shared office space off and on for 15 years and he always had a thriving business and real estate practice. While I was handling only personal injury cases (which seem to be recession-proof), Ken was juggling bankruptcies, divorces, wills and probate, business and real estate transactions and all manner of litigation. As to the current situation, Ken says, “in the last 30 days I have talked to five builders about bankruptcy. All are overextended and are not being paid by either the owners or the general contractors. Part of the problem is that lenders are so fearful of the future, so they are canceling builders’ lines of credit.” Two or three years ago, these same builders would have been sharing their development plans with him and paying their legal bills on time. The present downturn, he says, reminds him of the early 1980s and that downturn took four or five years to work its way through the economy.
I asked Ken what he does when his existing clients’ situations change and they stop coming in for advice or stop paying their bills. In the same vein, I asked him how he responds when a potential client comes in for the first appointment and it’s clear that person is facing serious financial problems.
His concerns are both for the client and his office’s cash flow. Many potential clients, he reports, just disappear after the first meeting when he gives them their options and tells them how much it’s going to cost. “I worry that their delay may cause them to forfeit their legal rights,” he says. Also, he goes on, “One problem that I have as a practicing attorney is that numerous times in the past I have placed a voluntary second mortgage on real property to guarantee the payment of legal fees if the client doesn’t pay as agreed. But with real estate values dropping 20 to 30 percent, the client’s equity has evaporated by the time they get to see me. Not only that,” he adds, “but if the client can’t even make his mortgage payment, he ends up in foreclosure and I am named as a junior creditor behind the bank.” It’s unfortunate for clients not to be able to have a lawyer at their side, yet at the same time, Ken says, “it’s not a happy ending when you do the work and don’t get paid.”
Tom Grella says that his area of western North Carolina hasn’t really been hit by the economic downturn and so his firm hasn’t been negatively affected, even though Tom represents many builders. Still, he does have a few clients who are having financial trouble and some of their accounts with the firm “have slipped for several months.” When accounts become delinquent, he proposes that the attorney talk with the client about it and work out a payment plan. He also advocates taking a long-term view of the client’s importance to the firm and says that he is “willing to be understanding of their situations.”
“The big picture is that they are serious clients who desire to be current and are interested in being successful,” he adds. “If you are thinking long term, it means responding to their legal needs, even when the present economic times might keep you from being paid as quickly.” That strategy, Tom says, will cause the client to remember your firm’s “sacrifice and loyalty to them through the hard times.”
Determining Your Next Steps
Tom’s approach makes sense if you believe that the client you are sacrificing for will survive those economic hard times. However, for those like Ken Baker, who have clients that may not be able to recover from their current financial straits, waiting for payment may well be the same as working for free. So what, then, can a small firm do to maintain its cash flow to where it can stay in business and continue to attract new clients and serve existing ones through uncertain times?
Law firms, like other types of businesses, are governed by the law of supply and demand. In your case, it sounds like demand for your services is down, while your capacity to service that demand (lawyers and staff) has stayed the same. The short answer is that “something’s gotta’ give.”
Tom Grella takes a more philosophical approach. “For the firm itself,” he says, “when business slows, it is an opportunity to step back and do some long-term planning and strategy for the organization. It is not helpful to worry about where the work will come from tomorrow, but it is helpful to plan ways to be in the front of the pack when times turn up once again. This means long-term planning and marketing. This may mean strategizing ways that the individual practice and practice areas may need to change since times have changed, and ways that one can anticipate tough times in the future, instead of ever again being in the position of only reacting after difficult times have hit.”
Of course, lawyers who have been hit harder by the current economic situation may not have the luxury of taking the long-view of the situation at present. Unless you can replace nonpaying clients with solvent ones, you may be forced to cut back on the supply side of the equation. Your firm might, as hard as it is, have to lay off secretaries or legal assistants or at least reduce their hours. You might have to trade down to less-expensive office space and look for other ways to cut costs.
However, everyone (including all the September issue’s contributors) seems to agree that reducing your marketing efforts and marketing budget is not a strategy for success. I take that to mean that solo and small firm lawyers will be better off spending their time marketing their services to attract new clients rather than working for free for nonpaying clients. Most lawyers, especially those with established practices, prefer to practice law rather than do marketing activities—but they may have no alternative if they want to stay afloat in today’s economic climate.
K. William Gibson is a personal injury lawyer and arbitrator in Clackamas, OR. He is the author of How to Build and Manage a Personal Injury Practice, 2nd Ed. (ABA, 2006).