Navigating Treacherous Legal Waters

Law firm management tips for an era of economic uncertainty.

The U.S. economy is, not to get too technical about it, in a weird place. A number of traditional economic indicators are all pointing in the direction of bullish ongoing growth. Others are bearish or outright frightening.

If you’re looking for good news, consider that the Dow Jones is up over 13% YTD, while overall market stability appears to have been increasing over that same time according to volatility indexes such as VIX. And have you tried buying a home lately? Demand is drastically outstripping supply in many regions. Houses are routinely selling as soon as they hit the market, sometimes for tens or hundreds of thousands above asking price. Buyers are offering all-cash deals and forgoing home inspections to get in on the action.

The Good, The Bad, And The Confusing

But that’s where we were back in 2008, and look where that got us. Although it’s unlikely that the same fundamental cross-collateralized financial collapses that fueled the Great Recession will repeat themselves, that red-hot real estate market does appear, at least in part, to be fueled by market speculation and pure FOMO. There comes a time when there’s no one left to buy all those tulips. No one’s going to claim total surprise if a market correction or outright crash hits. But few would bet their houses on it, either.

Other market indicators range from puzzling to outright worrisome. The strong YTD performance on the Dow was undercut Wednesday by a 450-point intraday drop being pinned on investor uncertainty. COVID-19 restrictions are lifting, and unemployment benefits are running out, but people aren’t going back to work as quickly as some expected. The Bureau of Labor and Statistics recently reported over 9.2 million job openings in the U.S. labor market, around the same as there were a month prior. No one has convincingly argued why, but plenty of theories abound, many of which likely bear some truth. Some families have learned to operate with a single income, while others are still struggling to secure the child care necessary to get back to the labor market. Some workers are refusing to go back given the quality of jobs available and are holding out for better wages and benefits.

And then there’s inflation, a central bank’s Public Frenemy No. 1. A bit of steady inflation keeps a market in a healthy condition. The U.S. Fed targets 2% inflation annually. The Consumer Price Index, one of the foundational measures of inflation in the U.S., clocked in at 5%, the highest increase since (gulp) August 2008.

The traditional move to curb inflation is to raise interest rates. Done right, that eases the economic engine out of the red zone, slowing the economy down just enough to get inflation back under control without losing too much speed. Done poorly, there are any number of ways for the economy to spin off the rails. Fingers crossed, right?

Sponsored

So What Do We Do?

Taken together, no one really knows where our economy is headed. The economy is always hard and complicated, and COVID-19’s effects were profound and unpredictable. It’s going to be a few more years, and a lot more analysis and argument, before we really understand what is happening today and why.

Unfortunately, “we’re not sure yet” isn’t a valid strategy in law firm management. Most firms feel the ebbs and flows of the economy. There aren’t that many truly evergreen practices. Most boom or bust over time, either in sync with larger economic trends (think real estate and corporate work) or counter to those trends (bankruptcy and litigation). It’s our job as firm leaders to be prepared for the changes ahead of us. In that spirit, here are some tips for the coming years to hopefully keep your firm thriving, no matter where we end up next.

Get Smart About Your Firm’s Debt

We spent the better part of a decade with interest rates in the basement following the Great Recession. Just as they’d started creeping back up, COVID-19 send the Fed scrambling to tamp them down again. Rates can’t get much lower, and with inflation creeping up, the Fed’s already tipped its hand that they will rise in the not-too-distant future.

Sponsored

If your firm is carrying any debt, now is the time to get your arms wrapped around it and understand what those rising rates might mean. If the loan is variable rate, the cost of maintaining those payments will probably be going up. It may be time to get aggressive on paying those lines down to free up more funds in future years, when the repayment terms may be more onerous. Even if it’s fixed-rate debt, paying down debt now can free up cash in the future on debt-servicing expenses.

All of this can be politically difficult, as firms need to stay competitive on the compensation front, and most attorneys prefer cash disbursals today over potential upside tomorrow. If the partnership can be persuaded, however, getting outstanding debt wrangled might leave a firm in a much more prosperous position as it faces future uncertainty.

Budget For A Bust, Have A Plan For A Boom

There’s never a bad time to revisit the budget and examine overhead. Every dollar wasted on unnecessary expenses is a dollar out of the pockets of a firm’s owners. Trimming extravagances, eliminating redundancies, price checking your vendors, and other cost-saving measures will help your firm successfully absorb a downturn if one hits. But if the economy stays sunny, all those cut costs might leave your firm with a nice pile of money waiting to be used.

As I’ve discussed in this space before, smart firm planning requires some amount of reinvestment back into the firm, whether it be in technology, physical renovations, or any number of long-term material improvements. Again, this balance is tricky. Too much reinvestment can leave the firm susceptible to poaching if compensation does not meet market levels. Too little leaves it uncompetitive on the client services front. Planning early and developing a set of priorities before the sudden windfall increases your chances of getting that balance right.

Invest In Your People

The firm’s management team isn’t the only group trying to figure out what today’s economy means. Your attorneys and legal professionals are wondering what their own futures hold and planning accordingly. The cure for all that fear, uncertainty, and doubt is community. People who feel like they’re cared for, part of a collective vision, and who feel confident in their leaders are much more likely to stay the course and help the firm ride out some potentially bad times. People who don’t feel that way are liable to jump ship in search of the security and family they’re missing where they are.

No law firm exists without people. Treat yours well, see them through their bad times, and they’ll see you through yours.


James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.