The meteorological summer of 2022 has come to an end. I hope all of you have had the opportunity to unwind and have returned to your offices invigorated and full of energy.
Over the past 6 months, the world in which we live has dramatically changed. Soaring energy prices, rampant inflation, an emerging food crisis. Behind all this is the war in Ukraine, rising geopolitical tensions, record heat and unprecedented drought. Who, like me, expected new roaring twenties after Covid, could not have been more wrong. This are once in a generation dystopian times and this will affect us all.
After the legal industry has had two of their best years in history in a row, revenues around the world have now started to drop. There has been a sharp decline in M&A activities to the extent that even trainees and associates at the elite investment banks are starting to get worried about their jobs. Bars in the financial centers across the world are reporting an increase in visitors, a telltale that the corporate finance world is not swamped with work like it used to be a few months earlier.
If it rains at the investment banks, it will drizzle at the law firms. Also in the legal industry, M&A activity is slow as are other practices that are closely tied to capital investments. Most other practices seem to be holding up fine for now.
In an industry that is tuned for eternal growth a revenue drop (not just a lower growth rate) is bound to create tensions and panic. Certainly since costs are rising at the same time. There is higher marketing and BD costs, higher salaries, higher recruitment, higher occupancy (energy), and so on. Many law firms have also made high numbers of new partners in the past two years. Less revenue, higher costs and more partners. This doesn’t sound good, does it?
When Covid hit in March 2020, the legal industry braced for a hit. Many firms took strong measures to safeguard their liquidity. While this was a clear overreaction driven by fear, fueled by the unknown, it could well happen again. Partners as a group have their own distinct dynamics. Even if on an individual level the majority of partners does not feel alarmed, the group might panic. Once the herd moves there is little management can do than follow the direction of the herd.
It is in times like this that law firm leaders need to act proactively and remain in full control. Do not hide, do not wait for one or more partners to take an initiative or ask questions. Law firm leaders should act first, decisive and firmly. Please allow me to give you some pointers:
1. Make sure you have adequate management information
For any manager it is essential to have reliable real-time management information. This is especially true if business is at risk. Make sure you have weekly data on workload and utilization. Also closely monitor the influx of new matters.
It goes without saying that all fee earners must keep up to date with entering billable time in the system. It wouldn’t hurt to remind them.
2. Do not start cutting costs
Yes, costs have increased since 2020 and 2021. The costs of salaries have increased for most firms. Partly due to growing headcount and partly due to raising salaries and bonusses paid. Client events are back and so are conferences. This increases the marketing budget.
We would not recommend that you start cutting cost in order to preserve the profit per partner. You will know by now that it is extremely hard to find and keep talent. Many law firms learned the hard way during the financial crisis in 2008. Once talent is gone it is gone and it will be near impossible to get them back once the economy bounces back.
Also, you are well advised to keep investing in marketing and business development as this is especially important in times of slowing business.
3. Trust your partners. Invest in cooperation and a sense of stronger together
If as a managing partner, you have the illusion that it is your task to manage the firm, I’m afraid you cannot be more wrong. Managing partners should provide guidance and a clear direction regarding the strategy and the priorities. For the execution they must rely on the partners. While this is true when there is a nice tailwind, it is even more important when there are strong headwinds like right now. Show your partners the direction to go, motivate and monitor, but don’t deprive them of their personal responsibility and autonomy. Put great emphasis on cooperation. The partnership is so much stronger as a close knitted team, than as a sum of individuals.
In times of ‘trouble’, you don’t want your partners or anyone else in the firm guessing or speculating. When people start to speculate about the future, they are in this economic climate inclined to pivot towards the worst case scenarios. No need to say this is bad for morale and will lead to panic and calls for immediate action. Once this starts to happen, management will quickly lose control and become the playball of the sentiment. The only way to prevent things spiraling out of control is communication. Don’t leave people second guessing. Communicate frequently and openly. No hiding, no silence. This is also applicable vis a vis your clients: communicate more than you usually would.
5. Use the moment
The legal industry has seen unparalleled workloads over the past two years. Leaving everyone exhausted. At times it seamed like there was only work and then more work. When the business cools down like it is to be expected, one should embrace the moment to recuperate and get better. Probably the best thing a law firm could do in the months to come is to invest in people development.
This is exactly what we are already doing with some of our clients. We help them set up structural personal development programs for their partners (and associates). Such programs focus entirely on the 7 Core Dimension© that we have identified. Partners, without exception, highly appreciate, structural support in building a stronger practice.