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A Very COVID-19 Year-end (2020)

Updated: Jan 13, 2021

Having just experienced the equinox (autumnal or vernal depending on your hemisphere), we are now entering our third season of the COVID-19 era.

For those law firms with fiscal years tracking the calendar year, this also means the fourth quarter is nearly upon us, thus raising several interesting and even vexing questions: In the midst of a global pandemic and economic crisis as well as civil unrest and a pending national election in the U.S. (gulp), what does that mean in the context of “business as usual” vis-à-vis end of year activities? How do we balance what law firms need to thrive (i.e., revenue) against the needs of corporate legal departments (i.e., cost control) in an unprecedented environment? (Typing that darn word makes us feel like refugees from an April 2020 car commercial, but if the cliché fits…) How can law firms be sensitive and nuanced in their dealings with clients while maximizing 2020 results and ensuring a solid foundation for 2021 and beyond? How do clients work with their providers in a way that recognizes the reality of the law firm business model (owner operated, cash basis, conservative by nature) in a difficult economic period? (Full disclosure: While this article may be U.S.-centric in its year-end context, the ideas presented herein apply irrespective of geography.)

To place those questions in further context:

  • Corporate clients are not a monolith in that some practice areas are hot (IP, Life Sciences, Employment, Restructuring) while others are considerably less so (Aviation, Hospitality, M&A, Energy).

  • Likewise, law firms are not a monolith. Bigger firms work with a wide range of clients experiencing very different situations. Based on relative cost to their bigger cousins, mid-sized firms may find pockets of opportunity where it was previously harder to “get in the mix”. Smaller firms may see similar opportunities while facing the downside effects of the economy in a more intense way.

  • The U.S. lateral market feels surprisingly active given the state of the world, and contraction of law firms (e.g., big firms buying up small groups) feels likely.

  • Corporate law departments are becoming more efficient and focused on value which could translate to further consolidation efforts – managing fewer firms is easier operationally and provides the opportunity to leverage fewer relationships into significant value.

With that foundation, let’s talk about three critical fourth quarter “business as usual” topics: (a) Pricing, value and billing rates, (b) year-end collections and (c) market demand.

Pricing, value and billing rates

Economists and pricing experts would advise to take rates up as much as possible to avoid leaving money on the table – even if it means having to then provide further discounts in specific cases. In the current environment, how might that approach be perceived, and is it wise for law firms to operate as they have in the past? If you accept that law firms should be laser focused on value, what should be the impact on the annual rate increase process? Over the past six months, numerous webinars, surveys and anecdotal observations in the legal press have noted the growing importance of certainty to clients: in other words, no surprises! That desire for certainty translates to the use of budgets and fixed fees so that the hourly rate should be less relevant which raises an interesting question: Assuming that firms recognize and adapt to this need for certainty, how should annual rate increases be navigated? Reconsider the traditional “one size fits all” approach? Move away from the global rate increase model? Introduce pricing by product line or practice area (e.g., price busier practice areas or industries appropriately)? Soften the increases until we have a proven vaccine while committing to better budget management? These are not necessarily recommendations, but points to be considered.

Key takeaway: Consider the client’s perspective and lead with the value proposition.

Year-end collections

Cash is king (or, ahem, queen) in a law firm partnership - thus the tendency to “carpe diem” and get as much cash in the door as possible to maximize fiscal year-end results. Coincidentally, this concept is not inconsistent with the pandemic lesson to live in the moment because we don’t know what surprise(s) await. Alternatively, firms may be wary of robbing Peter to pay Paul amid uncertainty about the timing of economic recovery in calendar 2021. Under the assumption that any hope for a v-shaped recovery in 2020 has evaporated and that economies will recover at a relatively languid pace in 2021 and beyond, both perspectives should be considered vis-à-vis the potential impact on cash flow when weighing 2020 collection targets and setting expectations for law firm partners.

Key takeaway: Be thoughtful in expectation setting and collections efforts.

Market demand

Market demand “is what it is” based on economic and market conditions and specific client needs. That said, a coordinated effort of strategic planning and client relationship development can maximize a firm’s share of demand. One hallmark of the legal industry that distinguishes it from other industries is the reliance on existing relationships to identify opportunities for new work and drive revenue. The trust and goodwill embedded in the law firm-client relationship tend to drive business overwhelmingly to the same firms over time – thus, the maxim that the bulk of a law firm’s new business originates from existing clients. Accordingly, disrupting incumbent relationships or seizing opportunities for clients looking for a change requires the diversification of business tactics with activities such as the following. Of course, these tactics can also cement existing relationships and reduce the risk of losing out to the competition.

  • Price by product line to balance the portfolio

  • Develop alternative staffing models

  • Leverage Legal Project Management (“LPM”) techniques

  • Consider new service delivery models

  • Design business processes to focus on the customer experience

Focusing on these tactics in the fourth quarter will yield sustainable long-term growth and change irrespective of the current economic context. To the law firm professionals in the audience: Embrace the ecosystem to drive this change. Bring together pricing, LPM, business development and practice managers to identify and prioritize opportunities. Obtain feedback from your managing partners, practice leaders and department heads. Work with the legal operations and procurement teams at your key clients to validate your understanding of their priorities and your understanding of what they value.

Key takeaway: Do something! Many of the ideas above are not necessarily new, but the context in which we currently operate has changed dramatically so that these concepts take on increased importance in a significant way. The sooner concrete action is taken, the better for both law firms and their clients.

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