Will your firm flourish or flounder in tougher economic times?
Given talk of an economic downturn and a possible recession in Australia, senior managers in law firms need to start recession-proofing their businesses and identifying their strengths and weaknesses, writes Trish Carroll.
Australian economists are not alone in predicting an economic downturn, or even a serious recession, depending on whether you are a glass-half-full or glass-half-empty person.
Law firms generally do well in good times and in bad times; it is the times in the middle that are more problematic. When there is uncertainty, it leads to indecision about strategy, investments and how best to lead.
The growing and real threat of recession in the United States and Europe and the implications for professional services firms (PSF), and effective leadership, was the topic of several discussions at a recent Harvard Business School PSF leadership program. Back in what feels like years ago (November 2017), Australian economist Peter Switzer was one of the first to predict Australia would go into recession in 2019-20 due to historically low interest rates and, judging from more recent comments from Mr Switzer, he has not changed his outlook.
“Larger profits making Australian law firms the happiest they’ve ever been,” was the commentary in much of the media reporting about the CommBank 2018 Legal Market Pulse Report (released in December 2018), along with observations about law firms expressing the highest levels of confidence about industry and broader economic conditions since the CommBank started producing this report.
The report is a must-read. Among the many things that stood out is that the current buoyant levels of confidence dive to 37 per cent for the two-year outlook – taking it from 85 per cent to 37 per cent.
Depending on the nature of your law firm’s skill-set and client base, a recession may be the stuff of dreams. Economic downturns are a fact of life and historically they last less time than economic prosperity; they just feel much longer.
Knowing tougher times may lie ahead and being prepared for them are not the same thing. Here are a few ideas to consider implementing now, not when things get worse. These ideas apply as much to a firm as they do to an individual lawyer’s practice.
1. Grow your client base and/or reduce any client concentration risk
- Make sure your existing clients are feeling the love.
- Identify which clients might be most negatively impacted by a downturn and engage with them on strategies to help reduce the impacts.
- Identify the industries, and the clients you have in those industries, that are most likely to remain buoyant during a downturn and engage with them in ways that reinforce the value of your firm as a trusted advisor.
- If you or your firm are overly dependent on any one single client and, particularly if that client is in a declining sector, then start diversifying.
2. Align products and services to meet demand, and diversify or repurpose
Economic downturns often bring out the worst in people: rates of divorce increase, families fight more over wills and estates, employment disputes increase, and even the incidence of personal injury at work rises in recessionary times.
Falling house prices usually closely correlate with higher mortgage arrears and, sadly, we all know what type of legal work this generates.
While home-building approvals are on the decline, the infrastructure pipeline being funded at state and commonwealth levels is staggering. And it is good news for lawyers.
Lawyers with skills in restructuring, insolvency, bankruptcy and security enforcement will be kept busy. Tax lawyers are always in demand during tough times and their colleagues specialising in regulatory prosecutions will also have full dance cards in the aftermath of the Hayne royal commission. Regulators’ legal budgets have been given a big, and much-needed, boost making this another recession growth area.
These are just a few of the areas that benefit most in a downturn. It is likely your firm has the expertise to take advantage of the upside of a recession and you just have not been promoting their value to your clients, or the market, as much as you need to. Starting doing that. Now.
3. Focus on finances
Check the early-warning signals even more frequently and closely than usual, such as higher-than-normal work-in-progress, slow collections, write-offs and serial under-performers.
4. Plan for the worst and hope for the best
Some firms (admittedly not many) use scenario planning as a way to make assumptions about the future, determine the implications and impacts of those assumptions (scenarios) and agree on plans to prepare for them. The basic analytics outlined in Steps 1, 2 and 3 will help identify scenarios that, unless plans are agreed and actioned, will move from scenario to reality faster than you would like and you will not be prepared.
In tough times, and I would argue in good times, too, nothing matters more than the quality of your relationships with your clients. Strong, trusted relationships are the bedrock of sustainable businesses and that is a big element of what helps them flourish in boom or gloom times.
Trish Carroll is the principal of Galt Advisory, a firm focused on helping law firms devise and implement successful marketing and business development strategies. She can be contacted at email@example.com.