This is final installment in a series of four posts about how law firms can anticipate, prepare for, and respond successfully to the next recession or economic downturn.
In the previous posts, we have considered two “survival secrets” of law firms during the Great Recession that began in 2009, and from which many economies have not yet recovered. These “survival secrets” are:
- Pay close attention to the business.
- Look for innovations in client care.
This post outlines the third, and possibly most important, change that law firms must make to increase their chances of surviving the next recession (assuming that they emerge from the recent one):
- Master new dynamic approaches to planning.
“Who could have expected…?”
This was the plaintive response of many law firm managers to the Great Recession. The unhappy truth is that the factors that triggered the near-collapse of the U.S. economy in late 2008 and 2009, and facilitated the spread of the crisis to most parts of the world, were obvious. (Our firm, for example, was advising our clients as early as late 2003 of the possibility of a near-catastrophic collapse of the real estate bubble in the United States, as well as about its possible effects elsewhere.)
The most important part of recession proofing a law firm is planning. Most economic crises are predictable well in advance. However many lawyers and law firms either do not know what signs to look for; or, if they do, they are too busy to notice them until it is too late.
Even worse, some see them, understand them, but retreat into the denial” ”Our firm is too big [or too old][or ranked too highly][or has too many important clients] to fail.”
One plan might not be enough.
Traditional strategic planning methods can be utterly useless when a financial crisis strikes a law firm and its clients. It is not enough to rely on static and usually uninformed methodologies, such as the SWOT analysis (strengths, weaknesses, opportunities, and threats).
Moreover, one strategic plan might not be enough. Most law firms today should investigate several well-informed business scenarios. Each one should describe a set of probable changes in the level, nature, and complexity of the demand for legal services in the next three to five years.
Instead of one plan, your firm might need three, five, six or even more tightly focused plans, each in response to a different, reasonably probably economic scenario.
Can you answer these questions?
This sometimes involves asking complex questions, none of which can be answered in a single partners meeting or a weekend retreat. For example:
- How are our clients’ needs for legal services likely to change in the next three to five years?
- To what extent have we validated these conclusions with reliable, systematic data from our clients? To what extent are we just guessing at our clients’ futures?
- What are the best-case scenarios for each of our client sectors and practice areas? What are the worst-case scenarios?
- What are the leading indicators of these changes?
- When and how will we respond to each leading indicator?
Do you have the courage to answer these questions?
Some essential questions can be disturbing, but they must be confronted. For example:
- Which of our competitors are most likely to lose their market position during a recession, or fail altogether?
- What of our competitors are most likely to strengthen their market position and financial strength during a recession?
- What new competitors, such as foreign law firms and accounting firms, are likely to take advantage of the uncertainties in our market and move into it?
- Which of our clients are most likely to survive a recession? Which ones probably will not survive?
- What factors give us the most confidence of our own survival of a recession? What factors cause the most apprehension?
- How long a recession can we survive?
- To what extent must we be prepared to ask underperforming partners to leave the firm? If this becomes necessary, how will we decide who must go? Should we consider asking them to leave now, before a crisis strikes?
- When do we decide that we must liquidate the firm? What financial measurements will we use to assess whether our firm can be saved?
Plans that you hope never to implement.
Unlike traditional strategic plans, which one wants to implement successfully, this scenario-based planning method will include in a substantial number of tactics and action plans that you hope will never be executed.
But you will be prepared, and when the crisis comes, will be better able to focus your efforts on taking care of your business and looking for innovations in client care.