Few law firm managers would place contingency planning at the top of their management agenda given the current economic climate. However, a number of factors suggest that the tide might be turning and less prosperous times could be on the horizon. It is therefore vital for firms to plan now for any future downturn to ensure they are in a strong position to ride out the storm.

For now, the London financial services market is thriving and has been for some time. Both the simplified regulatory environment for smaller companies offered by London's Alternative Investment Market, and the restrictive Sarbanes-Oxley rules in the US, have made the UK an attractive place to do business. Private equity and M&A activity is booming, while City bonuses have hit record levels. However, the market must peak eventually and the warning signs are already out there.

Interest rates have increased significantly in percentage terms in the past couple of years and a further rise looks probable. Leading figures in the property sector have already called the top of the market. In the US, the collapse of the sub-prime lending market has sent ripples through the economy and could further threaten the stability of the UK financial services sector. All of these factors point towards a less stable economy, and law firms, along with other professional practices, must take note.

Many law firms have not factored such changes into their financial planning. When there is a downturn in work, these firms may have little to fall back on. Failure to prepare can be caused by many factors, from simple over-confidence to a lack of resources. All partners are extremely busy, with little time to sit down and plan; and managing partners may be too involved with client work to actively 'manage' the practice.

Younger lawyers will not have experienced the recession of the early 1990s, and the high demand and profits that are currently enjoyed can lead to a false sense of security throughout a firm.

A number of dangerous practices could lead some firms to suffer more than others during a downturn. Viewing only this year's profits as the paramount consideration and setting a budget with very little put aside for future investment or for harder times is a risk. Partners may wish to maintain their current lifestyles rather than fund future uncertainties, but this short-sightedness could prove catastrophic. Encouraging fee-earners to maximise billable hours at the expense of future development may also be unsustainable and lead to disappointment when levels of work fall, even if profits are still high in absolute terms.

Law firms can also be susceptible to a downturn due to a common lack of efficiency. With no immediate crisis to handle, there is often no emphasis on leanness or efficiency and underperformance goes unchecked. Even a slight reduction in billable time could cause serious problems, especially given currently high salary levels.

With firms finding talent rather than clients to be the limiting factor, some have allowed costs to escalate and substandard lawyers to coast along on the success of others. Not only are underperforming lawyers not weeded out, but in the race to attract new talent, vast sums of money are spent on recruitment. This creates unrealistic expectations and feeds an increasing desire for higher salaries. This cannot continue indefinitely and law firms' margins will ultimately suffer as a result.

This scenario is potentially very troubling. However, there are a number of 'best practice' measures that can be implemented to ensure that firms retain their competitive edge.

Prudent, well-managed practices will have a clear and focused strategy for their future. Whatever the economic climate, a firm needs a contingency strategy, supported by partners, and reviewed frequently. This strategy should be detailed in business plans giving specific actions and these plans should be split on a departmental or geographic zone basis.

Firms should impose tighter financial management systems. Running a firm as an efficient business means adhering to a simple adage: save for the future and make every penny count. Underperforming partners must be brought to task now to ensure the firm's long-term success. Just because there is enough money to go around does not mean that some partners should be allowed to ride on the coat-tails of others.

In busy periods, there is considerable investment in time and money on recruiting new staff. In the event of a downturn, however, a consequence may be the need to be review personnel levels. Severance payments and subsequent recruitment on the next upturn are both expensive. Consideration should be given, if possible, to recruiting new staff on a fixed-term contract basis to avoid expensive commitments if present activity levels drop.

Similarly, firms should be wary of taking on additional office space on a long-term contract. To a certain extent, staff levels can be flexible (even if the cost of losing them is high). However, property obligations are usually non-negotiable and can be a huge financial burden in times of cost-cutting. This is particularly true if a firm is looking to merge within the next few years; firms with no property ties are worth their weight in gold.

As well as looking internally, firms should keep an eye on their environment. Cycles of work in the market can often be anticipated and the firm's service range can evolve accordingly. For example, in the UK there is a danger that the currently booming private equity and M&A markets will quieten, leaving corporate lawyers far less busy. But what if a firm's corporate team is bringing in the highest fees? Firms should evaluate whether or not they have become overly dependent on a service which might fall off during a downturn.

Do they have an idea of what could go wrong in their primary markets? Or know which practice group is most heavily emphasised at the moment and what sort of work will they be doing for their clients? For example, the current boom in M&A work could be replaced by restructuring work next year.

If a firm's corporate finance team can adapt to corporate recovery work, the firm will be more resilient to this change in the market.

Marketing activity continues to be as important as ever, even when firms are not actively seeking new business. Business development and the improvement of client relationships are arguably just as vital as fee-earning, even if they take up resources at a time when client workloads are heavy.

Of course, the key to all of these measures is timely implementation. Any law firm that is starting to find itself rather too settled, even complacent, should reassess its strategy as soon as possible in order to adapt effectively to whatever challenges arise. Firms which build competitiveness into their businesses will find themselves in a strong position when times are hard in the market. There is no better time to do this than now – before it is too late.

David Furst is chairman and head of the professional practices group at Horwath Clark Whitehill.