Editor’s Note: This story is adapted from ALM’s Mid-Market Report. For more business of law coverage exclusively geared toward midsize firms, sign up for a free trial subscription to ALM’s weekly newsletter, The Mid-Market Report.
Law firms are not immune to recessions.
That’s unlikely to come as news to anybody in the legal industry in 2019, but 10 years ago, that realization took more than a few unsuspecting firms by surprise, recalls Paul Hughes, managing partner of New Haven, Connecticut-based Wiggin and Dana.
“The Great Recession was really the first time in my years of practicing where law firm profits were going down—not just shrinking a bit or stabilizing—but going down,” Hughes said. “Law firm head counts were going down year over year. A lot of that drove the need to really manage law firms as a business.”
Firms that learned to be “disciplined” during the last recession and stayed that way after the economy bounced back are better positioned to survive the inevitable next downturn than those that made only temporary adjustments, according to Hughes.
“Historically, firms have gotten bloated, fat and happy during the good times and then shrunk a little in the leaner times,” he said. “I think the firms that got lean and ran like businesses [during the Great Recession] and have participated in the current expansion meaningfully…and continue to run in a lean, business-like manner are going to be fine [in the next recession]. The ones who haven’t, they’re going to struggle.”
R. Max Crane, managing partner of 130-lawyer Sills Cummis & Gross in Newark, New Jersey, said firm leaders have a responsibility to manage their businesses with the recognition that another recession is always somewhere on the horizon.
Crane said his firm has been on a sustained upswing recently, with new business coming in, lawyers working “at or near capacity” and high morale at the office. Despite that, when it comes to the next economic downturn, “I always assume it’s going to be tomorrow,” he said.
“Part of my job is to say, ‘slow down,’” Crane said. “Law business, like other business, goes in cycles…The real test, the real mettle of a firm, is what you do in difficult times.”
For Los Angeles-based Raines Feldman, preparing for difficult times has meant strategically building a diverse collection of practices designed to maintain stability throughout the economic cycle.
“Last year, we brought in a bankruptcy partner from Venable,” Feldman said by way of example. “When we’re slow” in the corporate and transactional practice, he said, “this group will be filled up.”
But almost regardless of practice focus, the concept of running a midsize firm ”like a business” can be boiled down to two basic tenets: (1) manage your expenses and (2) listen to your customers.
As purchasers of legal services have become increasingly sophisticated in the decade since the Great Recession, it’s no longer enough for midsize firms to offer a cheaper alternative. They need to offer a more valuable alternative, according to Hughes.
“It would be disingenuous to say price doesn’t matter,” Hughes said. “Of course it matters to the client, but I’m a little past price, in a way. Ten years is a long time and while price is still a factor, I don’t think of the clients as caring about price per se. It’s marrying the right price to the right issue.”
The ability to offer clients high-caliber lawyers at comparatively lower rates than larger firms requires midsize firms to keep a keen eye on their expenses.
Hughes said the leg up for a firm like 150-lawyer Wiggin and Dana—which has four locations across Connecticut and small offices in New York City, Philadelphia, Washington, D.C. and Palm Beach, Florida—is “less a pricing advantage and more an overhead advantage.”
“For the quality of lawyer we can bring to bear on a client’s issue, we have pretty low overhead,” he said. “That has everything to do with where our offices are located.”
But again, as Hughes stressed, price is just one component of value. The smart midsize firms learned during the recession that the real value-add is in exceptional client service, he said.
For Wiggin and Dana, Hughes said, that has meant making an effort to learn about clients’ businesses and the issues they face in their industries. That way, the firm can offer holistic legal advice that takes into account more than just the single matter that happens to be at the forefront at any given time.
“There is a mindset shift from telling clients what we do to asking what they need,” he said.
But, Hughes acknowledged, that’s a concept many lawyers are not comfortable with and that lawyers of a certain generation simply didn’t have to invest as much energy in prior to the Great Recession.
“Every day, every interaction is the audition for that project and the next one,” Hughes said. “That wasn’t the case 20 years ago. Some people take that as a negative, but I don’t mean by that that clients have somehow changed for the worse. Somebody will say, ‘Wow, the profession has gotten really tough.’ But again, I see it as an opportunity. We have very grateful and engaged clients.”
A brass-tacks approach to business administration will help midsize firms to weather the next recession, but, as we’ll examine next week, true growth in the future will require thinking outside the box and possibly making some difficult decisions.