Law and the tightening economy

This week’s article AmLaw 200 Managing Partners Issue Fog Advisory for 2008 provides a clear snapshot of some of the challenges facing law firms and lawyers these days.  According to the article, a “substantial number” of managing partners (25% of those polled) are “uncertain” about their firms’ prospects in 2008, largely due to the slowing transactional market and a drop-off in new litigation.  A secondary factor cited by one blunt firm leader is the perception that firms have stretched their resources to their limits: “We can’t beat the donkeys any harder.”  Nevertheless, 92% of leaders surveyed responded that they expect their firms’ profits per partner to rise next year.  These leaders are tightening the reigns on their donkeys in several ways, according to the article:

*  Making (unspecified) structural changes.

*  80% expect to hire fewer partner-track associates or to bring in a higher
percentage of contract and staff lawyers over the next 10 years.

*  2/3 plan to shift the partnership balance at their firms even farther away from
equity partnerships, either by de-equitizing current partners or by building up
the ratio of nonequity partners among future hires.

*  61% expect to experiment with alternative billing arrangements.  However,
other interviews suggest that these experiments are almost destined to fail.

*  99% plan to raise billing rates, with almost 2/3 planning to do so by more than 5%.

Brian Ritchey, the new primary voice of More Partner Income has an interesting post today that examines the strategies law firms use to increase profits.  The top strategies identified (based on a survey of midsized firms conducted by the Remsen Group) are (1) increasing fees and (2) increasing marketing and business development.  Cost cutting and improved efficiency are the next most effective steps, with only 7% citing an increase in billable hour requirements.  After examining the results in more depth, Ritchey provides his summary of steps likely to produce more profit:

• Better efficiency in workflow – lower the days to bill and days to collect fees;
• Discontinue “lock-step” compensation increases to the extent your firm uses this to compete;
• Adopt and adhere to a written, achievable strategic plan;
• Measure your key performance metrics:
o Effective rate upon collection of fees;
o Realization both at billing and collection;
o Productivity (billable hours or equivalent);
o Operating Margin;
o Leverage – either by headcount or billable hours;
• Market to your strengths – don’t be afraid to ask for business.

While there’s a lot to be said about the uncertain economic forecast and the likely belt-tightening underway, in a sense, it isn’t new at all.  I see two key questions: what can you, the individual lawyer (whether associate or partner) do to secure your place at the table, and what can firms do.  One area of overlap is in business development efforts, and that’s where both individuals and firms should be focusing now.  (Again, this isn’t news… Just affirmation of what’s been clear for quite a while now.)  If you’re hoping to maintain and grow your role within your firm, bringing in new business or cross-selling the current clients is the best opportunity.  And I’d also suggest that firms would be wise to shift some of their associates perks from luxurious indulgences to training and support designed to help their associates (and partners) achieve business results that will profit both the firm and the individual lawyers.

And how about for the associates who may be feeling like the real donkeys in this picture — fungible billing units, probably being asked to bill more with even less promise of achieving equity partnership, at least in large firms?  Business development is the key to increasing the chances of hitting equity.  And I continue to suspect that bright lawyers working as solos or in small firms have an unprecedented opportunity to woo clients from large firms, as discussed here and here.