Expansion and contraction, boom and bust, bull market and bear market: the fluctuation of the economy is as American as baseball and apple pie. According to the nonpartisan National Bureau of Economic Research, the nation has gone through 33 distinct business cycles dating back to the mid-1800s; we’re currently in the 34th period of market expansion.
While post-WWII growth cycles typically last about 4.9 years from trough to peak before the inevitable period of decline sets in, if our current bull market makes it to June 2019, it will have been charging for longer than twice that — roughly the same length as the all-time record. It doesn’t take a Warren Buffett to recognize that a period of contraction is likely coming — and sooner rather than later.
Law firms will be uniquely at risk during the next bear market. While the economy as a whole has been growing rapidly for close to a decade, the legal field never fully recovered from the “Great Recession.” During that downturn, companies cut down on legal costs by parceling out jobs to multiple firms at lower rates; embracing so-called alternative legal service providers (ALSPs), which undercut traditional law firms; and appointing “legal procurement professionals,” whose job is to find and engage the most cost-effective legal services possible.
After the economy recovered, these companies saw little incentive to go back to a more expensive model. Eventually, the effects of this changing market for legal services will affect practically every law firm, regardless of specialty — from corporate law to personal injury.
And now for some good news
A recession is coming at some point, one that may hit the legal profession especially hard. But all is not lost! Because we already understand the market forces that pose the greatest threat to law firms, we can be proactive about counteracting them. In 2017, Thomson Reuters set out to understand what firms succeeding in this environment have in common. They looked at a wide range of firms across regions and sizes over a three-year period, then assigned a composite score to them based on certain success metrics: overall profit, hours billed, and revenue generated per lawyer.
The top quartile of performers were dubbed “dynamic” and considered most likely to continue to perform well in a bear market; the bottom quartile of performers were dubbed “static,” and considered at serious risk during a market downturn. What Thomson Reuters found was a difference in philosophies: in the former, a willingness to adapt and benefit from a changing business model, and in the latter, a resistance to acknowledge such change.
Below are five tips, each building on the last, that we can learn from these dynamic firms — and can help you not only survive the coming recession but thrive during it.
1.) Invest in improvements now, while the economy is still strong. As we’ll see in a moment, embracing technology is one of the best ways to improve efficiency, and therefore profits. As Thomson Reuters discovered, dynamic firms dramatically outspent their competitors on both business development and technology, by as much as 300%. They noted that dynamic firms embraced a philosophy of “investment” while static firms held to “the status quo.”
2.) Another thing that the dynamic firms had in common is that they offered fewer discounts and write-downs to their clients; in other words, they were charging more than their competitors. This may seem counter-intuitive, but it makes sense. Rather than cutting prices to reflect the true value of their services, dynamic firms improved the quality of their services to justify a higher price tag.
3.) The question, of course, is how to simultaneously increase the quality of your services, appeal to value-oriented clients, and improve profits. While these may seem mutually exclusive, they’re quite possible to achieve — by embracing technology. Digitizing and streamlining the back office reduces overhead while freeing lawyers from the repetitive tasks that don’t require their (value-generating) expertise.
4.) ASLPs can be your friends. Dynamic firms recognize that alternative legal service providers have changed the marketplace and that there’s no putting the genie back in the bottle. Rather than pretend they don’t exist — or worse, try to compete with their low price point — dynamic firms use ASLPs to do the grunt work that previously kept their lawyers from maximizing their value. ASLPs often harness automation and artificial intelligence to reduce the human workload of everything from discovery and document review to project management and administration — technologies that only the largest law firms could afford. By outsourcing these tasks to an ASLP, your firm can harness these strengths while offering a level of legal expertise that an ASLP-only approach simply can’t match.
5.) Finally, as you address tips one through four, recognize what works and what doesn’t throughout the process. This is deceptively simple, but to emulate the “dynamic” firms, you must be… dynamic. Improvement isn’t a destination you can reach, but rather an endless road leading upward.
It is vital for firm owners and managers to be prepared for the next recession and try to stay ahead of the changes in the legal market. By doing so, you can shield your practice from some of the negative impacts that come with a significant market downturn.