October 23, 2012

How to Survive in a Down Economy

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September 2008 Issue | Volume 34 Number 6| Page 32


How to Survive in a Down Economy

Whether you call it a recession, a slump or a slowdown, the economy is clearly in a time of decline. While this especially affects firms with financial institution and real estate practices, most firms will feel the pinch one way or another. And at the same time that billable hours and revenues decline, associate salaries and other costs continue to rise, creating a tremendous squeeze on partner income. In this special roundtable, the participants—whose law firms vary in size from 8 to 1,700 lawyers—discuss strategies that firms should take to cope with a downturn.

Ed Flitton (EF): For firms suffering a downturn in work, what are your recommendations with respect to associates? Do you lay them off? Do you stop hiring?

Tom Grella (TG): Well, you may stop hiring for a while, but that might be shortsighted for the future. Likewise, making layoffs is shortsighted if you’ve got good people working for you. I’ve been with my firm for over 20 years, and we’ve gone through many ups and downs—but we’ve never laid anyone off because of a slowdown in the economy.

Mark Robertson (MR): In the previous series of downturns we had, laying off associates was the absolute last thing we wanted to do. Laying off associates is basically throwing away your future. You hire people with the expectation that they’re going to succeed and that you’re going to help them succeed. If over a two- or three-year period, you either fire folks because the business is temporarily down or you don’t continue hiring newer lawyers, you will assuredly face a gap five, ten, fifteen years out that’s going to be hard to fill. And every partner needs to remember that those are the people who are going to support you in your retirement.

The other problem is that partners tend to hoard their work when times get a little tougher. That, too, is a destructive practice, since what happens is that the clients are then being billed at partner rates when it should be at an associate rate—so clients may be paying more when they can least afford to do so. Also, if the associates are getting fired, or not getting enough work and not getting properly trained, it pushes down productivity and leverage for the firm.

When the economy starts going sideways or declining is when partners really need to take responsibility as owners of the business and not continue to pull out 99 cents of every dollar for themselves.

Jim Lantonio (JL): Unfortunately, it’s rare to find a firm that looks at a downturn as an opportunity to strengthen itself, as opposed to letting paranoia set in. I believe most of the problem is with firm leadership failing to set the example for the other partners. Instead of encouraging partners to keep thinking of how their productivity determines their paychecks, leadership has to face the issue head on and say, “Okay, this is a year we’re each going to have to scale back on our own. We’re not going to pay as much attention to your individual productivity, but we are going to look at how you’re using some of this ‘free time’ to build for the future. What are you doing in terms of working more with the associates? What are you doing in the area of business development? What better time to investigate this foreign market than when you have a downward economy at home?”

Ed Coultas (EC): You never get rid of the talent because that’s your future. That doesn’t mean you give them three or four years to find themselves. Instead, it may mean that you look a little closer and faster at who really has the potential for success.

I do, though, see firms minimizing a lot of their hiring and going with smaller classes because they are watching their budgets very carefully, and because they know their acceptance rate will be much higher in a market in which jobs are becoming more scarce. Related to that, there’s an interesting phenomenon that I think we’re starting to see with this economy: Associates suddenly seem to have greater job satisfaction.

EF: What do you do about billing rates if you see your clients aren’t doing well?

TG: One consideration is if your work involves areas where the client views the legal service more as a commodity. If you are not willing to think about reducing your rates with respect to those types of services, clients may be apt to look elsewhere to have those services provided at better rates.

MR: I think when the economy is declining and clients are having trouble, lawyers really need to look at alternatives to billing by the hour. How can the firm translate what the client needs and values into something other than just 3.6 hours? What value does the client put on the given work, and how can you look at that value and determine a better way of charging for it—by, say, using associates or paralegals or technology or a combination of all that to achieve a win-win for both the client and the lawyer?

In tough times, clients particularly want to know what something is going to cost. And if you can’t tell them that it’s going to cost $6,000 to do this transaction or whatever and then figure out how to make money at that level, they’re going to go elsewhere to get the work done, or they’re going to try it in house, or they’re not going to do it at all. So I think tough times are a great opportunity for lawyers to look at how to change the paradigm of what they do to provide value.

On another point, about 10 years ago when we increased our rates and found some clients weren’t happy about it, we came up with this solution: We offered them the ability to prepay into our trust account at the old rate, in whatever amount they wanted to pay. So essentially, we allowed them to buy at the old rates for a while.

EC: We’ve increased rates at different speeds in different practice groups for some time. In fact, we now have associates in some practice groups charging more than partners in other practice groups. We knew that we could get the return based on the value being given to the client and that clients have become increasingly sophisticated about judging value.

EF: Let’s move on to the issue of collecting. Do slow times affect how that gets done?

JL: In my firm, I’ve found outsourcing all collection activity in terms of outstanding bills over 90 days old has been more effective than anything else. In good times, lawyers—especially the partners—resist that very much. But in bad times, where they’re faced with having to call the client time and time again begging for money, they’re much more amenable to having someone else do it. And once you get your foot in the door with this kind of process, it’s simple to continue it after the economy swings back.

Although to clarify, when I say “outsourcing,” I’m not talking about turning it over to a collection agency. We use an organization that really specializes in this, and it hires retired bank loan officers who have a professional demeanor in interacting with clients. They actually work out of our space, so for all practical purposes in a client’s eyes, they seem like part of the firm. It’s amazingly more effective than anything we’ve been able to do internally.

EC: We use internal people who we’ve specifically hired and trained and who have a deep knowledge of the firm and our clients. In my estimation, they do a better job. It’s certainly possible that an outside company could do as good a job, and I think there’s a place and time to use such companies, as long as they understand that the people they are contacting are really your clients.

TG: In our smaller firm, in-house staff, who do other jobs for us as well, make these calls. They have been fairly successful at it, I’d say.

EF: I’m sure using the more-senior kind of person that Jim is describing works with some clients and not with others, perhaps depending on the client’s size.

JL: I think it really has to do with the quality of the person you’re using.

On accounts between 31 and 90 days old, we have a younger person in the accounting department communicating with a counterpart in a client’s office just to make sure that the bill has been received and there wasn’t a mechanical problem or anything like that. But once the bill hits the 91st day, where it becomes evident the firm is probably going to have some other kinds of problems with the debt, then we will elevate it to the next level.

EF: In the context of a slowdown, what do you do on the expense side of the equation?

TG: We’ve been reducing expenses in a lot of areas lately by turning to -Internet-based services. For example, we’ve saved an unbelievable amount on postage by using an Internet postage company. And we’ve gotten rid of all the postage machines in our office and eliminated the cost of leasing those machines through the postal department.

MR: When things start going south, a lot of partners start panicking and not only talk about firing associates, paralegals or secretaries, but also about how the firm needs to cut costs on number 2 pencils and such. But let’s face it, the amount of financial impact that the nuts and bolts of running a law firm has is pretty de minimis.

One of the more substantial things that our firm is looking at is pushing the equipment replacement cycle out another six months or a year. So, instead of getting new laptops every two years or 18 months, maybe we get them every two and a half or three years, or maybe we don’t replace the printers quite as quickly.

TG: That can certainly have an impact, but at the same time firms have to be really careful that technology isn’t automatically the first place they look for cuts. For some partners, it’s always the first place they look because technology represents a huge expense and it doesn’t “directly” bring any income into their pockets. Plus, going back to Mark’s point about alternative billing, since technology helps us complete tasks more quickly, some partners see dollars going out the window because they’re getting things done quicker while continuing to bill by the hour. So why, they wonder, are we implementing all this new technology?

JL: Firms need to be concentrating on the revenues rather than on the reduction of expenses. Most already pretty much took the fat out of the expenses during the economic troubles in the 1990s. But, of course, there still are things that can be done. For one, the whole concept of outsourcing components of firm operations can save you significant amounts of money at the end of the day. And usually when things are tight, firms are more amenable to looking into those possibilities.

Also, in terms of spending money on technology or similar enhancements, I would argue that you can be better off doing it when the economy is going south because you can get much better deals. So if you have aging equipment or a service that you’re going to have to replace within the next six months anyhow, you may want to consider going to the market now.

EF: How do you deal with the slowdown’s impact on the morale of partners, associates and staff?

TG: There is nothing to be gained by hiding information from your people during difficult times. The greater the openness about the difficulties being experienced, the more likely that your actions will be received with an open mind and understanding by the people who work for and with you. There seems to be this unifying effect when you bring all your people into a difficulty—you need to let them take ownership of it with you.

MR: I agree. First and foremost, communicate with everybody on the team regarding where things are, and don’t be afraid to let them know if things aren’t going well. The worst thing that can happen is if you don’t communicate, because they’ll just start guessing and thinking that things may actually be a lot worse than things are.

Also, the more information you share, the more solutions that might bubble up. We’re blessed in that lawyers are really smart people. Whether they’re associates or junior partners or senior partners, when you get very smart, creative people thinking of ways to address problems, you can get some very good answers.

Leadership at the partnership level is especially critical. The partners need to take responsibility for being the owners of the firm and to take a position that they won’t be hoarding work and will continue making assignments to the associates, thereby showing that they’re willing to sacrifice some current income for the future of everyone at the table.

And just as a minor point, continue the social functions, such as holiday parties. Even though it may cost a little bit more, it repays an awful lot in terms of morale for the team that you’re trying to move forward.

EC: We also remind our young lawyers of the last time that real estate was down and how it rebounded. We have such short memories that we tend to forget that we have gotten through these cycles before. But bottom line: If you treat people right and are honest with them, they’ll be willing to suffer through the painful times with you.

JL: The concept of acknowledging and sharing the pain across the organization is a powerful one. I remember one firm during an earlier economic downturn that gave all the information to all its employees, and it said the firm was going to focus on trying to protect the job of every person in the organization. And, they said, if that meant each person there had to suffer some, management would rather do that than fire 5 or 10 percent of the people just so everybody else still had a job. They followed that approach during that whole period, and the results in terms of loyalty were amazing when the economy finally turned around. Not only did the people who were there pass on leaving to go work at places that paid more money, but the firm didn’t have to pay a headhunter fee for at least three years because people were lined up to get into that firm.

EF: Do you have other thoughts on dealing with an economic slowdown, to wrap up our discussion? Perhaps a few last words on working with clients?

TG: The clients who have been with you for a long time need to be a major focus. Even if your firm isn’t experiencing a difficult time yet, some of your longtime clients likely are. And you want them to be your clients not only now but in the future. That means that you need to spend some time contacting them to learn what they are going through at present and how your firm can serve them in response.

MR: I couldn’t agree more. In fact, during the slowdown of the mid-1980s, which was pretty brutal on the oil and gas industry, clients that had paid our firm vast sums of money to do oil and gas deals in the preceding years were facing real financial trouble. So we met with every one of those clients, thanked them for the business they had given us in the past, and asked them what we could do to help them get through the issues that they were now facing. In a number of instances, we actually provided pro bono work to help them survive. If someone had paid us $100,000 or $200,000 in fees the year before and was struggling, the fact that we were willing to give them $20,000 or $30,000 worth of services without any expectation of payment made a huge difference to them. Some of them made it through the crisis, and some of them didn’t. The ones that did survive, though, are clients for life.

EC: For good, longtime clients who are in trouble, another approach is to develop an alternative fee arrangement—say perhaps you allow them to pay 60 percent now and the balance at a later date.

There are all kinds of things to look at with respect to the client that has been true to you—and firms should absolutely investigate those things because, after all, without good clients, how can firms themselves survive?