Redwood Analytics

Larry Bodine has joined the chorus warning of a coming recession with a post titled Get Ready for the Recession—Part 2. In his post Doom and Gloom for the legal profession—it’s coming, Gerry Riskin provides detailed warning signs that there is trouble ahead.

2007 is going to go in the books as another good year for most law firms. However, the bust in the sub-prime market and resulting credit collapse brought the good times to an end for others. The dot com experience and the current sub-prime bust are proof again that law firms heavily dependent on a few clients or single industry are at risk. It is important to consider the susceptibility of firm practice areas and major clients to the particular kinds of risks we face today.

2008 appears to be problematic. We know what goes up comes down--recessions happen. 2008 could be the year. They say “What doesn’t kill you makes you stronger”. That saying has a ring of truth to it for those who go through a recession successfully. Recessions can be a time of opportunity and increased market share, if one is prepared and plays it right.

In times of uncertainty, you should avoid overextending the firm in terms of debt, merger activity, or overreaching in terms of talent additions. Use the time to consolidate your gains, strengthen your law firm financial health and improve operational performance. You should emphasize improved planning, workflow efficiency, and tweaking the firm’s performance metrics. Focus on improved effective rates, better scheduling and delegation. Speed up your billing and tighten collection efforts. Get rid of people you should have already let go—those who are not making a positive contribution to the firm’s goals and objectives. Use this period to replace any remaining legacy systems. You don’t want to depend on systems that lose support during a recession or are operationally unsoundly. Nor do you want to have the competitive disadvantage of being behind your peers. Convince you partners that they can win by being conservative with partner distributions in order for the group to hold back some rainy day funds for the uncertain period on the horizon.

Most of your competitors will cut back on firm travel, advertising and capital expenditures. That early reaction to a down turn is usually followed by a cut back in hiring, then a reduction in support staff and finally a cut back in legal talent.

The smart people go into a recession with dry powder and they increase expenditures on advertising and other business development activities. They have positioned the firm to take advantage of opportunities created by the disadvantage of others. They make moves that strengthen and grow their firm while others are eating their own flesh, cutting back and shrinking.

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