An article posted today in the Law Society Gazette suggests that as many as 5,000 small English law firms and solo practices could be forced out of business within the next six months. Most of these firms are retail firms, or "high street" firms, that primarily serve individual clients and small businesses in relatively small matters, such as real estate conveyancing.
The problem, in a word, is cashflow.
The President of the Law Society of England and Wales, Simon Davis, is quoted:
Although a firm may be open for business, this does not mean it is business as usual. Residential property transactions have ground to a halt. Reduction in court hearings has massively impacted on the amount of work available - while social distancing and the lack of face-to-face meetings is causing difficulty delivering in other areas, such as the execution of wills.Although cashflow is important -- it is the lifeblood of a law firm -- we need to evaluate and understand a law firm's current financial situation and near-term future prospects with reference to a broader analysis of the basic drivers of law firm profitability. (For more on this topic generally, see Clark and Walker Johnson, Sustainable Profitability in a Disrupted Legal Market (London: Globe Law and Business, 2019).short-term and mid-term perspectives on survival and recoveryOne successful approach that we have observed during the past two months has been to take both a short-term and mid-term perspective on a firm's profitability challenges. Some firms have been able to obtain some relief by asking clients for larger advance payments and, whenever possible, giving priority to matters that will put money in the client's hands faster (and, by logical extension, fees into the firm's hands faster.) But, for most law firms, with the flow in the revenue pipeline slowing to a trickle, the obvious and most practical solution is to reduce operating costs as much as possible, but be mindful of the risk of cutting too deeply into the operating muscular structure of the firm. Longer term, the successful approach for most firms that survive the short-time crisis (and not all will do so) will be to restore and enhance productivity through greater operational efficiency.Neither sides of this integrated approach will be easy.Two other points have already emerged about the strategic and operational tolerances of the post-pandemic legal market."Who could have expected...?"First of all, whining about how unexpected the pandemic and its consequences accomplishes nothing. It won't make you or your colleagues feel better. Just the opposite: If you give the matter more than a moment's thought it actually might make you feel -- and look -- stupid.In fact, just like in the Great Recession of 2008-2010, a substantial number of law firms did anticipate something like we are now experiencing and already had contingency plans to respond to it. ("What if" strategic and operational planning is something that our firm has been advocating since 2002.) These are the firms that have been reporting to us, during our videoconferences with them during the past two months, that although times are challenging, they are actually doing better than they had expected."Who could have expected" is not the an effective way to start to develop an effective crisis response. Don't go there.zombie apocalypse or the "new excellence?"Second, firms that are thinking and talking about a "return to normalcy" (to quote one of the worst U.S. presidents, Warren Harding) are probably doomed. They might stagger forward for a few years after the crisis is over, but they will be zombies, shedding their best clients and talent as they stagger incoherently back into the dark. We also would like to see law firms quit using the term "new normal." That is at best a strategy for institutionalized mediocrity. The law firms that will achieve sustainable success after the pandemic -- whether six months, a year, or even longer from now -- will be ones that focus on the "new excellence."Norman Clark