No really, the time is now to prepare for an economic slowdown
Tim Ryan, Managing Director of Growth Enablement at Williams Lea, shares why firm leaders should consider taking certain measures to ensure their law firms thrive amid any economic conditions.
There’s a line in Hemingway’s 1926 novel, The Sun Also Rises, where one character asks the other, “How did you go bankrupt?” “Two ways” is the reply. “Gradually and suddenly.”
It seems like when I was contemplating writing this post just a few weeks ago, it was merely to stress the importance of taking preemptive measures against a possible market downswing. But in a few short weeks, we witnessed historic market volatility and business disruption from the Covid-19 pandemic and the collapse of OPEC talks. The stability of our daily lives has been jolted into economic uncertainty and a new normal for social and work activities.
After unprecedented growth for nearly a decade, now is the best time to raise awareness of the factors that are likely leading to an economic downturn and discuss the steps you should be taking today to protect profitability.
What’s affecting the economy?
Last year, top economists said there was about a 41% chance we’d be in recession by the 2020 US presidential election. While not always easy to predict, we are already seeing from a macro perspective certain events affecting the economy.
On the global front, we are contending with Brexit, the Covid-19 pandemic, Saudi-Russian oil price war, and China real-estate bubble. In the US, we have a contentious presidential election in November. Historically, presidential elections adversely impact the economy to some degree, depending on the candidates’ proposed policies. According to SmartAsset.com, the DJIA and S&P 500 are known to generate below-average returns during presidential election years.
Law firms are not exempt from the risks of these economic corrections.
The post-peak echo effect on labor costs also needs to be considered: The labor buyers’ market swells labor costs in times of economic growth. During a correction, the gap in revenue of the new labor costs can be a difficult deficit to close. Firm leaders need to make wise decisions about minimizing this gap to protect their margins. Clients are fighting similar battles and their needs will pressure firms to deliver operational efficiency through stricter outside counsel guidelines and prescriptive billing methods, among others.
Measures to take against an economic slowdown
In our 2019-2020 Trends and Opportunities in Law Firm Outsourcing Survey, we asked respondents what measures they are considering taking now, and would take in the event of a recession. These forward-thinking measures, listed according to near-term, intermediate, and long-term timeframes, can serve as a guidepost for firm leadership:
About one third (34%) of law firms who participated in our survey reported they were considering outsourcing support functions to protect profits, while 31% said they are considering alternative service delivery options. With a trusted outsourcing solutions partner, law firms can realign their objectives, gain more flexibility, and improve economic efficiency along the way.
More than half of our survey respondents (59%) see process automation as the best way to build efficiencies to counter an economic slowdown. Legal processes like e-discovery and document review are already being automated. Time and expense tracking is another arduous process ripe for automation; presently, there are more than 50 billing software programs available to law firms.
About 43% of respondents also cited practice area investments as another measure to combat an economic slowdown. Law firms can focus on practice areas that are likely to flourish in a possible downswing, like bankruptcy, insurance, healthcare, and data privacy.
A long-term measure worth considering is real estate, which 35% of our survey respondents cited. While milestone changes to a firm’s real estate footprint are less frequent, they are a fantastic opportunity to make sweeping strategic changes.
Two and half years ago, a global client law firm decided to move their functional departments’ back office from a high-cost top US city to Williams Lea’s delivery centers in Wheeling and Columbus. Their foresight not only shed labor and real estate costs but created an opportunity to innovate the workflow of their back office functions.
For firm leaders, there’s no time like the present
That recession that seemed to be happening gradually? It won’t be long until it’s suddenly upon us. Pundits will have their predictions, but the reality is, economic corrections happen. Law is a risk management business, so it’s crucial to protect your business before a downswing even occurs.
The measures I mentioned take time to line up properly, so I encourage firm leaders to think boldly over the next one to three years and take the necessary steps to enable changes as early as now. Firms that stay agile and are quick to adjust business strategies are the ones that will thrive during and after an economic downturn.