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Law Firm Crisis Management After The COVID Crisis ‘Black Swan Event

Paul Smith* Partners in many law firms are greatly concerned as to what the future will bring as they come to grips with dealing with the fall out of the Covid-19 crisis. Now is the time to focus beyond the here and now to take steps to position the firm for the new world. This article sets out the steps to be taken now to make the firm fit for the future.

The Black Swan Event

Covid-19 is a classic ‘Black Swan’ event (‘Black Swan’ being an unpredictable or unforeseen event, typically with extreme consequences as first popularized by author and options trader Nassim Taleb in 2007). ‘Black Swan’ is an event with an extreme impact outside the realm of regular expectations because nothing in the past can convincingly point to its possibility or therefore its outcome.

Before Covid-19, the law firm market superficially appeared to be in good health with rising profitability year on year. For many firms, however, this success was brought about by reducing equity partner numbers and thereby reducing the number of partners sharing in the profit, coupled with attempting to increase the charge out rates to a progressively more resistant client base.

The apparent good health was also disguised by firms taking on high levels of debt and individual partners also taking on large amounts of personal debt in the form of capital loans to fund their investment in the firms. Some firms had even outsourced their billing collections to third party debt collectors as a consequence of the build up of bad debt. Partners often justify the high levels of reward they are paid because of the level of risk they take.

As a consequence even prior to the Black Swan event of the Covid-19, many law firms were far more fragile than was thought or believed. The evidence is now piling up daily that many firms are already in distress. Deals and real estate transactions are drying up with layoffs and furloughs occurring in many firms.

Partner drawings are being reduced or halted and 4 day weeks introduced. Sadly, as with the great recession of 2008, some firms will inevitably disappear. Among them will be some household names within the industry as previous success does not guarantee a bright future. 2008 accelerated the demise of Dewey Le Boeuf in the US, Heenan Blaikie in Canada and Halliwells in the UK.

Batten Down The Hatches

Dealing with the immediate fall out of the Covid-19 crisis law firm leaders will always do what they do which is to “batten down the hatches” and “ride out the storm.” The firm will have already set up its crisis management team with members from key disciplines such as finance and IT. The more forward-thinking and resilient of firms will have expanded this crisis management group to a highly trusted colleague from the marketing department.

The firm will be focussed on keeping the cash flow coming in. Without sufficient cash flow, all businesses will fail. Discretionary spend will be cut. Staff will be furloughed or put on shorter working weeks or sadly will be laid off. The unpaid bills will be chased and the CFO will be constantly revising cash flow projections.

Firms will instinctively cut marketing budgets which are often the first to go and actually should really the be the last to go. The smarter approach is to re-consign the marketing budgets previously allocated for client-facing events into other media, including virtual activities, that demonstrate to existing clients and to the world that the firm is empathetic, pro-active and creative in the teeth of the crisis.

Review Lending

Firms will also be reviewing their lending facilities. Prudent firms will not have become dependent on a bank overdraft which can be withdrawn at any time but have in place longer term facilities like revolving credit facilities over say a 3 year period. These will buy the firm time to take whatever steps it needs to survive.

There is . . the old adage of – “Never let a crisis go to waste”. After Covid-19 it is generally acknowledged that the world will never be the same again.

Paul Smith

There will inevitably need to be open and frank discussion with lenders. Before the crisis many law firms were already on the “at risk” lists. As the old adage goes – when the tide goes out you see who has been swimming naked.

There is equally the old adage of – “Never let a crisis go to waste”. After Covid-19 it is generally acknowledged that the world will never be the same again. Trophy real estate has been an expensive mill stone around the necks of many law firm financers for many years. Covid-19 has forced remote working in a way which would never have been possible before. Will people want to return to commuting every day to physical offices? Now is the time to look at the firm’s real estate footprint and see how it can be substantially reduced.

Does the firm really need that thirty seat board room that is used once in a blue moon as the signing of large deals no longer requires acres of physical space? Review all lease commitments and see how soon properties can be vacated. Alternatively, talk to your landlord and negotiate a period of monthly rental relief – it is in their interests to keep responsible blue chip clients on their premises long term.

Keeping Informed

It will be important to properly institutionalise remote working into firm’s policies and procedures, the rules relating to the sharing of client data will be of paramount importance. It is vital to keep the firm’s people informed. Constant communication is vital to inform and reassure. Keeping the firm’s culture alive while people are working from remote locations is important and can be achieved through regular online team meetings, quizzes, competitions – I have even heard of a ‘virtual pub’. Do bear in mind that sharing from home will mean in the future that the culture will be less hierarchical, less corporate and more informal than it was before and act accordingly. At a time when people are worried and concerned a powerful gesture that a leader can make is to pass on her / his cellphone number and direct email with the suggestion that anyone at the firm could contact her at any time.

When I was the Chairman of Eversheds Sutherland I was always conscious that despite best endeavours someone somewhere would say that they had not been communicated to. I provided my personal contact details to all and the criticisms of lack of communication fell away.

Curiously the gesture was not abused and a handful of useful conversations ensued. I subsequently discussed this with another law firm leader who had had the same experience. In these times of great uncertainty I wholeheartedly propose that law firm leaders embrace the role and make themselves available to all stakeholders of the firm.

It is equally vital to keep clients reassured and informed with constant Covid-19 updates. The crisis will accelerate firm’s digital offerings. Investment in technology was already happening pre-Black Swan as firms grappled with how to take the firms digital future forward. They knew they had to invest but some firms were not always sure quite what to invest in.

Client meetings will be increasingly online rather than in offices and this will throw up a further challenge as to how to keep clients ‘sticky’ with the firm. Digital platforms which understand their buyers’ needs and gather data will be more important. Digital offerings will enable to in-house teams and private practice teams to come together as one rather than a piece meal experience of dealing with individual partners and individual teams.

Clients will increasingly become customers and will buy their services in a way that they buy other services in their lives. As Covid-19 plays out, law firm marketing will move inevitably from events and hospitality to savvy digital offerings with more self-service emphasis and more sophisticated and mindful use of client data.

Finally, this may be the point at which clients do seek to move away from the hourly rate to have more certainty with their billing and fees with more fixed price offerings. On the positive side, law firms often under-estimate the loyalty that clients have to the partners and firms. There is a huge amount of good will and clients understand what a firm stands for, what its beliefs are and what is its brand. Enhancing that brand when we come out of the other side will be all critical.

Paul Smith is Head of Professional Services at Calls 9, a consultant to law firm leaders across the world. He was until recently the chairman of Eversheds Sutherland and is co-author of The Real Deal: Law Firm Leadership That Works, co-written by Sally Dyson, and recently published by Thomson Reuters. About the book: ‘For current and aspiring leaders in law firms, I cannot commend this book strongly enough. Rooted in rich experience, every page is packed with practical guidance and deep insight. This is a work that should be compulsory reading for law firm boards everywhere.’  Professor Richard Susskind OBE, author of Tomorrow’s Lawyers.
Email: paulsmith@calls9.com

This article was first published in InhouseCommunity.com

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