As 2017 begins, we wanted to reflect on the state of small and mid-size law firms and the challenges they face. After spending countless hours with law firm leaders over the past 12 months, a clear picture emerges regarding the industry and the actions those leaders need to take to ensure success in their firms. Firms approach issues in different ways depending on their culture and the philosophies of the leaders of the firms. It is the actions firms take that will determine, not only their short- and long-term profitability, but their future.
Following is Part 1 of a two-part series specifically addressing the challenges facing small and mid-size firms.
The Market: Citibank and Wells Fargo monitor the law firm market and the results from the surveys they produce indicate that demand for legal services is stable at best. The result is that revenue only grows if new business is produced or to the extent firms can increase effective billing rates. Expenses continue to rise, more often faster than revenue. According to the recent Citi Survey, the legal market demand in 2016 grew by only 0.3%, while expenses rose by 3.4%, and revenue grew by 3.7% largely due to billing rate growth of 3.2%. This is a real problem for small and mid-size firms since their billing rate increase was the lowest in the legal sector. Citi predicts that 2017 will produce the same type of results. Therefore, in order to thrive, small and mid-size firms have to think and act strategically rather than taking the approach “business as usual.” Many firms are managing profitability by reducing costs (not very successfully) and headcount that masks the real problems and is not a strategy for long-term success. We have preached, for the last year, that strategic thinking, strategic initiatives, and, yes, strategic planning must drive decision-making. The days of ad hoc management are behind us so leaders need to embrace and support strategic management.
Law Firm Leaders: According to a recent small law firm survey by Thomson Reuters, in addition to acquiring new business, law firm leaders were most concerned about spending too much time on administrative matters, technology, information overload, and internal efficiency. Hopefully, the responses to the survey do not indicate how they are allocating their time. Law firm leaders are responsible for the business success of their enterprises. Yes, they are responsible for new business and brilliant and creative legal work, and most of all satisfied clients that continue to provide a steady flow of work but they are also responsible for the future. Many leaders are primarily focused on current profitability to keep their partners and shareholders happy. They need to expand their focal point to keep an eye on the future. One way to start that process is to start thinking proactively by creating a vision and a step-by-step plan to achieve that vision. In addition, they often need to make difficult decisions. For example, in most firms, lawyer productivity is declining.This will continue unless leaders decide to implement the same type of strict expectations that many of the larger firms have adopted. Of course, these expectations carry consequences and must fit within the culture of each firm.
Strategic Planning: Many leaders, partners, and shareholders of small to mid-size firms do not see the need for “true” strategic planning in their firms. They see their business as a relatively small steady enterprise and as long as the legal work is exceptional (which almost every firm produces), clients will continue to buy their services. We are surprised by the reluctance to engage in strategic thinking and the feeling, of some, that producing an annual budget is as effective as a business plan. Planning requires leadership. It is not easy to create a vision for the firm taking into consideration the culture, areas of practice, clients, competitors, and other factors.
Most firms manage for today’s profitability. Instead their focus has to be on tomorrow. An effective plan would not only hold leaders accountable but also create common goals for partners and employees to strive for. Partners would be compensated for the achievement of those common goals and consequences would be in place for not complying with expectations and behaviors that do not support those objectives. This will allow firms to strategically utilize their strengths and minimize their weaknesses as well as be proactive and look for and create opportunities instead of being reactive and constantly “putting out fires.”
If leaders are not providing strategic thought and initiatives, their future will be impacted. They might be acquired by a larger firm, even though most partners we talk to want to determine their own future. The worst-case scenario is they will cease to exist. Most small and mid-size firms don’t have the skills or time to create a “living” strategic plan. Law firm leaders are practicing law, acquiring business, resolving partner conflicts, putting out “daily fires”, worrying about administrative issues, etc. Managing partners typically have an alpha personality so seeking advice does not come natural. However, in this area, it is recommended that they ask for help. Don’t wait until it is too late. The best time to think about the future is now.
Conclusion: Small and mid-size law firm leaders face many challenges. If law firm leaders do not understand the market and do not create a vision and utilize business acumen and strategic management, there is a good chance that their firm will struggle to increase revenues and reduce expenses. In addition, partners will get frustrated with stagnation within their firms and begin to look at other opportunities. This could create a domino effect leaving the firm unable to determine their own future. Decisions regarding the areas of law, the pricing of services, acquiring new business, retaining existing business, and internal operational efficiencies have to be made. Many times small and mid-size law firm leaders do not have the expertise to make these time consuming difficult decisions. Do not be afraid to ask for help.
Part 2 of this article will focus on expenses and profitability.