This article appeared in Accounting and Financial Planning for Law Firms, an ALM/Law Journal Newsletters publication covering all financial aspects of managing law firms, including: building a law firm budget; rates and rate arrangements with clients; coordinating benefits for law firm partners; and the newest strategies to grow your firm and your career.

Over the past several months, the following headlines have appeared in the legal press:

• “Demand for attorney services has declined for the third consecutive quarter”
• “RPL grew at a 1.5% increase YoY from 2016 to 2017 in the AmLaw 100”
• “37% of General Counsel plan to expand their in-house legal staff in 2018”

While 2017 was a good year for some of the top firms in the AmLaw 100, for many mid-sized and AmLaw 200 firms, it was a flat to down year. The first quarter of 2018 continues the trend with the top AmLaw 100 firms seeing a .4% increase in demand while the legal market in general declined by .5%. It would appear that the old phrase “bigger is better” applies to this year's legal market.

Many law firms can and have survived “down” years in their history. In fact (for one client) a 10% revenue drop (resulting from a delayed multi-million-dollar client payment) combined with an even larger malpractice case settlement reduced partner income by almost 50%.

Another client lost half of its attorneys after a merger failed. After the merger was voted down by my client firm's partnership, approximately half of the attorneys (including several significant rainmakers) joined the other firm. My client was left with double the space needed in a very expensive midtown Manhattan office building and significant other vacant space three branch in Washington, DC and Philadelphia.

Many firms would not have survived these crises. They would have closed their doors and the attorneys and staff scattered like so many other firms that have failed. Yet neither of them did. In fact, in the immediate three years after each firm's crisis they went on to have some of the best, most profitable years in their history. The lessons learned from these two firms are (I believe) instructive and can be used to address the current market conditions that many firms are facing today.

The “New Normal” of today is one in which raising operating costs, associate salary increases, and reduced realization rates coupled with AFAs and demands from corporate counsel for reduced rates are sapping firm profits and there is no relief on the horizon.

Law firm leaders, seeing current conditions, should be asking if there is a better way. Is there a way that by acting now a law firm can assure a more prosperous future? Past practices and old “best practices” within the legal profession may no longer be the optimal solution. How is firm management to know which practices will serve it best in the new economy?

To answer that question and to provide guidance in how best to survive the new normal a firm needs to exam and upgrade its' operations, institutions and strategy.

By that, I mean:

Conduct an Operational Diagnostic

Emergency measures taken to reduce costs or staff do not equate to a full-blown operational diagnostic. Firms must deliver top quality legal services profitably. The operational diagnostic supports that goal by evaluating all of the administrative support functions. The key questions that the diagnostic seeks to answer are:

• Why do we do it that way? and
• Is there another way that improves the service and reduces our costs?

Strengthen the Institutional Fabric

There is a risk that law firms that lack the cohesiveness of long established firms with strong cultures and inclusive management will fail. Without restating and reinforcing the firm's institutions, it will be difficult if not impossible to build or strengthen a team approach that has all oars in the water and pulling in the same direction. A firm built on recent mergers and poorly executed integration plans will be particularly vulnerable to dislocation.

Reinvigorate the Strategy

Especially for firms facing revenue stagnation or an actual decrease in the top line, a strategic review and improvement programs are essential. Practices and offices that are neither strategic nor profitable must be critically evaluated and either a profitability improvement plan developed or the practice abandoned or the office shuttered. The ambitions and objectives of the firm must be revised in light of current market realities and some tough choices made.

These three inter-related efforts should lead to better execution and in turn maximized competitive opportunities. Operational and strategic upgrades ensure that a firm will focus on the right opportunities and position it to best capitalize on them. Strengthening the firm's intuitions and culture will enhance the ability of the firm to accept and implement the necessary changes. Law firm leaders, however, must be ready to confront internal polarization brought about by the “uneven” application of these strategies.

By definition, some practices areas will be minimized or eliminated and some clients will likely be lost. Financial issues will arise such as too thin capitalization, alternative fee arrangements and even tax code changes will possibly limit the financial resources firm management has available to take the bold actions required.

Given the challenges, are law firm leaders capable of driving such change management? The odds favor law firm leaders who have a clear vision of firm strategy, who are consistent and clear in their enunciation of that strategy and are always open to discuss (with their fellow partners) the firm's new direction.

For the Long-Term Good

Operational Upgrade

The diagnostic review will result in numerous cost saving strategies that the law firm can implement. These strategies will be developed during a process redesign effort that includes all administrative services and functions. Secretarial realignment, high value add outsourcing, improved supply and vendor sourcing and support staff should all be included in the evaluation and redesign effort.

Administrative costs can also be reduced by redeploying staff to eliminate use of temporary workers and overtime. Time-saving technologies such as speech recognition time entry and dictation equipment should be deployed, as well.

Institutional Upgrade

Firm management will have to re-examine previous management approaches. Under consideration are practice structure, attorney layoffs, culture change, cross-selling, new competitors entering the market and old ones leaving, new government initiatives, and even the traditional partnership model. Firms that merely pursue survival measures, engage in ostrich tactics or lose time deliberating about potential remedies ad nauseam will either survive in a weakened state or parish all together.

While changes to practices and approaches may ultimately prove fundamentally beneficial to law firms, they are changes and changes impact how people work and behave. In a profession dominated by high-powered, left-brained, exceptionally logical principals, driving people-intensive change will be difficult.

Strategic Upgrade

From my experience, about half of my clients have a strategic plan. Of those that do, the average age is more than five years and most partners (if they know it exists) do not know its contents. Now is the time to update that plan! There are lots of strategic documents and they include numerous targets and objectives.

I prefer a less complex document. To me a strategic plan consists of a clear-eyed assessment of a firm's place in the market, its strengths and weaknesses and most important of all how and where it will invest firm resources (cash and partner time). A peanut butter strategy (everybody gets a little) is doomed to failure. One of the hardest decisions a firm can make is where to invest. There will be winners and inevitably losers. That is what management is all about.

Where to Find Help

The logical first place to look for guidance on effective change is other business sectors that have experienced far-reaching disruption in recent years — retail, government, and financial services. Alas, even with inventive change strategies, some 70% of businesses in these sectors have failed when assessed against initial business objectives. The overwhelming reason for this failure rate involve people. However, so do the successes.

The solution to driving change in law firms is for management to identify and engage the natural leaders within a firm who are both highly influential with their colleagues and who are change-positive by nature. These “change agents” can evolve day-to-day firm behaviors and deliver fundamental culture change within the firm. Peer pressure delivered by real change agents is the key to success.

Identifying the real change agents by firm management is a key milestone toward successful change management. These key individuals can work with firm management as team or project leaders to guide the firm through the change development and implementation process. The firm that embraces change management and develops its natural leaders will gain unanticipated new business opportunities and a strategic plan that optimizes future outcomes.

• Will adapting to the new normal be easy? No, it will not.
• Will adapting to the new normal be rapid? No, it will not.
• Will adapting to the new normal strengthen and improve a firm? Yes, it will!

But, as the old saying goes, “the journey of a thousand miles begins with the first step.”

*****

J. Mark Santiago is a member of Board of Editors of Accounting and Financial Planning for Law Firms and a certified Management Consultant (CMC). He is The Managing Partner of SB2 Consultants headquartered in New York City. While a partner at Deloitte & Touche, he led the two largest law firm administrative outsourcing projects in the United States. He is a frequent speaker and author and was the Chairman of the Am Law CFO conferences for 11 years. He was also one of the three originators of LegalTech in 1981 and a member of its Board of Advisors.