Planning Now for the Next Crisis
Even the best business strategies can be knocked off-course, or sometimes even wrecked, by a crisis that the law firm only vaguely anticipated, if at all.
Staying on course
Some law firms not only survive crises, but actually emerge from them stronger than ever before. Our firm’s observations of the experiences law firms of all sizes, but especially small and midsize firms, worldwide between 2020 and 2022, suggest that you can make your law firm “crisis-resistant.” You won’t be immunized from the effects of a crisis, but you will be able to resist its most serious effects and recover much more quickly.
Specific tactics might vary among different law firms, but there are at least three common, clearly observable outcomes for law firms that perform well in crises:
- They are able to mitigate, and in some cases avoid completely, any significant economic or operational impacts.
- Substantial operational changes, such as temporarily closing offices and remote working, do not have a significant impact on service quality and profitability.
- The firm returns to a level of operations and financial performance significantly sooner than competitors who did not have a crisis response plan.
In the COVID-19 pandemic, in particular, we observed that even if a firm’s plans did not foresee precisely every contingency or impact, or if they needed to be modified as the situation emerged, a law firm that had a crisis-response plan — even a defective one — managed the crisis better than did a firm that had no plan at all.
One of the common comments that we have heard from managing partners and other leaders of law firms that had crisis-response plans has been: Even with sharply reduced revenue, 2020 was a profitable year. At the end of 2021, the same group told us that revenue had returned to close to, or even higher than, pre-pandemic levels, with profitability that was consistent with, and in some cases significantly improved over, 2019.
Three elements, which we have observed in almost every successful crisis-management experience, least to a significant degree, i.e., to a degree that clearly influenced the favorable outcomes, are:
- Attention to business basics
- Innovative client care; and
- Scenario-based strategic and business planning
Paying attention to the basics
Cash is always important to any business, but it is critical to the survival of a law firm during a crisis, especially a worldwide economic disruption such as was triggered by the COVOD-19 pandemic.
These major crises typically result in cash-flow problems for law firms. Small and midsize firms are especially vulnerable because, for example, they usually are less able to offset decreased demand in transactional practice areas with increased needs for counter-cyclical services such as insolvency, restructuring, and litigation, which typically have longer payment cycles. Cash-flow problems become worse as accounts receivable get older. Smaller firms may also find that lines of credit become shorter and more expensive to access.
Financial stability is probably the best preparation for a crisis. Crisis-resistant law firms can answer questions that should be part of every annual business planning cycle, such as:
- Do you have cash reserves sufficient to pay budgeted operating expenses, including non-owner salaries, for at least 90 days without drawing against your line of credit?
- Are all of your equity partners up-to-date with any payments they are required to make into their respective capital accounts?
- Are all partners accountable for ensuring that unbilled work in progress is invoiced within 30 days, whenever possible?
- Are all partners accountable for pursuing accounts receivable that are more than 60 days old?
- How quickly does your firm bill expenses and disbursements? How can you make this process faster?
- Do you already have an agreement about when, and by how much, to reduce partner draws or base salaries to respond to a cash-flow problem?
- Have you already maximized opportunities to reduce personnel and facilities costs through outsourcing of internal operations and administrative functions?
- Have you carefully examined the profitability of your branch offices, if you have any? Are there ways to reduce any unnecessary duplication of facilities costs produced by having multiple offices?
Sometimes finding the answers to some of these questions might involve some uncomfortable discussions, but they must be answered, not just as a crisis appears on the horizon but as part of the regular annual business planning process. For example, if a firm or practice group is going to base its business plan on the assumption that they will receive a projected level of revenue from a client, they must also consider what they will do if that work does not materialize. We’ll cross that bridge when we come to it is the worst possible response, because if the crisis arises, the bridge may have already been washed away.
Taking good care of clients
Crisis-resistant law firms retain and strengthen their ongoing attention to clients, not only in normal times but especially during a crisis. In most commercial law firms, a relatively small number of clients — usually 15% to 25% — produce a disproportionately large share of the total fee revenue, often more than 80%.
When financial troubles strike, these top clients must be the first into the lifeboats. They do more for your firm than to provide most of the cash. They frequently understand, better than do most smaller clients, the differentiating competitive advantages that your firm presents to the market. They are also usually powerful sources of referrals of new clients. Losing even one of these top clients — even one that might temporarily have trouble paying their bills — during a crisis can cripple your firm’s financial performance and competitive position long after the crisis is over.
A crisis-resistant law firm will not only keep most of its best clients through an economic downturn, however. It often will actually increase the average fee productivity and profitability of the entire client base. The best way to do this is to deliver a reassuringly high level of responsive services that not only address crisis-related legal issues, but also anticipate them, and to be closer than ever to clients during challenging times.
Examples of crisis-care techniques for clients include
- More frequent contact — not less — with the client to ask about things that are not often the topics of usual discussions, such as: how the client is coping with the crisis; its practical effects on the client’s business and personal life of the people in the client organization; and whether there are any non-traditional services, advice, or assistance that the firm might be able to provide;
- A complementary comprehensive crisis-management legal checkup to identify any subtle legal issues or services that the client might not have anticipated;
- Promoting and participating in clients’ crisis-management planning;
- Extended payment plans, without late charges, for client fees; and
- Discounted legal services for clients’ employees.
Uncomfortable but necessary thoughts
Being able to respond to crises such as natural disasters, military action, epidemics, and economic downturns is a high-value strategic skill. Contingency planning, especially in the first three decades of the twenty-first century, has become a necessary, albeit sometimes depressing, part of the strategic planning process. However, as the American philosopher and essayist Ralph Waldo Emerson (1803-1882) once said, “Knowledge is the antidote to fear.”
The most important part building a crisis-resistant law firm is well-informed planning and documentation, both on the year-to-year level of business planning but also in multi-year strategic planning. It is sometimes called what if? planning. Even though one hopes that a contingency plan will never need to be implemented, it is an essential part of effective planning and implementation in any business today, but especially for law firms, most of which have very little financial or operational tolerance for disruptions.
The old whining excuse of who could have ever expected this? in no longer valid (if it ever was). Almost all crises are foreseeable, often well in advance, if only one knows where to look. 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.
Moreover, in uncertain times and disrupted markets for legal services, traditional strategic planning methods can sometimes be useless when a crisis strikes a law firm and its clients. The firm can find itself in a forced-change situation, usually with a sharply reduced range of options and an increased urgency that sometimes forces decisions without adequate information.
A central characteristic of crisis-resistant law firms is that, as part of their long-range strategic planning and shorter-term business planning processes, they develop and investigate several well-informed business scenarios. Each one of these 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. Thus, an integral part of your firm’s planning process should include a description and an investigation three, four, or even more tightly-focused contingency plans, each each in response to a different, reasonably probable scenario. Some of these might pertain only to a single practice group; others might be for the entire firm.
This sometimes involves asking complex questions, which cannot be answered in a single partners meeting or a weekend retreat. For example:
- How probable is each crisis? How serious could the results be? Some law firms make the mistake of eliminating from consideration any events or developments that they believe to be unlikely. This can be a costly mistake. The better approach is to focus on the ones that could have the most serious consequences, and then assess their probability. A “500-year hurricane” is unlikely, but if it occurs next year the consequences could be very severe. Such possibilities, although of low probability, cannot be ignored.
- To what extent have we validated these conclusions with reliable, systematic data? To what extent are we just making educated guesses? Are we being overly optimistic in minimizing the risks? Conversely, are we being overly pessimistic in minimizing the resources that we can marshal to manage the risks?
- What are the worst-case scenarios? Even if the probability might be relatively low, how badly could the situation deteriorate?
- What are the leading indicators of these changes? What changes in our markets’ economic indicators should we watch to alert us to an oncoming crisis? Which of our firm’s financial measurements will be the first signs of a possible crisis?
Some of the questions can be very difficult to answer, because the firm might lack accurate, reliable information needed for a well-informed plan. Sometimes, even with the best efforts to collect this information, it might not be readily available. Some of these questions might be difficult, disturbing, and sensitive because they involve unresolved issues in the firm’s workplace culture or the cohesiveness of its partnership and the priorities of individual partners. Nonetheless, they need to be asked, and crisis-resistant law firms muster the courage to face them. For example:
- What factors give us the most confidence of our own survival in this scenario? What factors cause the most apprehension?
- What are the risks that we face in terms of lawyer retention and retention of our major clients? Law firms that we consider to be crisis-resistant reported that they were better able to protect their lawyers, including partners, from recruiting efforts by other firms. They also found that more frequent contact with their major clients often provided valuable intelligence about developments within the clients’ organization, or their markets generally. This produced more focused, client-specific responses to changing needs for legal services and changing expectations about the delivery of those services.
- Which of our clients are in the greatest risk of not surviving this scenario? Crisis-resistant firms who had superior knowledge of their clients’ businesses were better able to help vulnerable clients, some of which did not fully understand their peril.
- Which client relationships need special crisis management plans? Some of these firms developed crisis-response plans for each of their major client relationships and have continued and expanded that practice as they emerge from the COVID-19 pandemic. One of the top five quality indicators cited by law firm clients in the Walker Clark Strategic Business Development Survey has consistently been, over the past twenty year, Understands my business. Responsiveness and availability of partners are two others. In times of crisis, these three quality indicators become even more important to clients.
- 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?
- What special efforts will we need to make to maintain the reputation of our law firm in the markets in which we compete? For example, how will the partners continue to maintain and, to the extent possible, expand the firm’s presence in business and professional associations in the community?
- When, if ever, should we decide that we must liquidate the firm? What financial measurements will we use to assess whether our firm can be saved?
Conditions for success
During the COVID-19 pandemic, as well as other recent crises such as the economic impacts of the military conflict in Ukraine and the global financial crisis of 2008-2010, we have observed how crisis-resistant firms have taken their plans and practices beyond just sitting around a table, asking what if…?
We have seen how successful crisis-management responses in crisis-resistant law firms include six common features:
- There is a documented plan. Typically, an adequate crisis-management plan is brief, sometimes almost in the nature of an outline or a checklist, and usually requires no more than three or four pages.
- The plan is specific. It describes reasonable actions, as well as who will be responsible for ensuring that they are accomplished.
- The plan is communicated, both within the firm and, as is relevant, to clients.
- The plan is tested at least annually. Our observations during the COVID-19 pandemic demonstrated that when a crisis-response plan failed to function as intended, it was usually because of flaws that could have been detected had the firm actually conducted a simulation or exercise. Looking at the plan and thinking about it are not enough.
- The plan includes metrics, the most important of which are a set of warning indicators that a crisis is impending. It also should include simple performance metrics to assess progress in the crisis response and to detect, if possible, emerging issues that could make things worse.
- Truth is the best crisis-management tool. The firms that responded most effectively to the COVID-19 pandemic, both operationally and financially, communicated frequently and truthfully with everyone in the firm about the current status of the crisis, the firm’s ongoing responses, and the prospects. They also kept major clients informed of how the firm was responding and the efforts that the firm was making to minimize the impact on client services. A crisis is not the time for the leaders of a law firm to be concerned about “optics” or “not panicking the troops.”
Unlike traditional strategic plans and business plans, which one wants to implement successfully, the scenario-based planning method outlined in this paper will produce a substantial number of well-informed tactics and action plans that one hopes will never be executed. Nonetheless, in the fast-moving and frequently uncertain times that the legal services industry — and law firms especially — face in the 2020s and beyond will increasingly require serious and specific planning if a law firm is to become truly crisis-resistant.
This is one of the most cost-effective ways to ensure that you are ready to meet the future, however that future may confront you.
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