Originally published in The Legal Intelligencer/law.com
The verdict is in: the party is over. The soaring revenue and profits of 2021 are a distant memory. As law firms glide back to earth, an interesting phenomenon is taking hold: fear. The pressures and anxiety of living through three years of unprecedented uncertainty, volatility and near-constant change has left law firm leaders spent – and highly skeptical. Despite economic indicators predicting reduced inflation, slow growth (note, not a decline) and a muted but still active transactional market, many law firms are behaving the way they often do – protecting short-term profits at the expense of long-term prosperity.
This myopic thinking, however, is not the only miscalculation leaders adopt in times of uncertainty. Several wayward tendencies threaten to set law firms back as leaders grapple with how to guide their businesses through uneven times. More importantly, ambiguity is likely to become the norm rather than the exception for decades to come. Effective leaders and successful law firms of the future will learn to embrace change, reject perfection and accept the vague. They will learn to identify and anticipate the following common mistakes and then take action to remap how they approach the world.
1. They stop spending
It is tale as old as time. Profits per equity partner climbed 19% in 2021 on the back of pent-up demand and depressed expenses. Law firms roared into 2022 with high expectations, then contended with significant compensation hikes followed by tempering demand. By year end, at least according to Wells Fargo figures, law firms fared well. Revenue in 2022 exceeded 2021 by 3% and profits per equity partner dipped just 3.9% from the prior year – an expected trajectory given the leap in 2021 was propelled more by market forces than strategic wizardry on the part of law firms. And this is where the disco ball stops spinning.
Though law firms fared well in 2022 and, for many, better than expected thus far in 2023, the comparison to 2021 is stark. Performance is down. Transactional work is slowing from its frenzied pace. Litigation is just now starting to ratchet up. Perennial concerns about maintaining the profit pool are rearing their ugly head and self-preservation is kicking in. The seemingly simple answer: cut spending. Investments – in talent, technology, marketing – will come to a screeching halt, or at least slow to a trickle – and progress in key areas such as increased efficiency, talent development, strategic implementation, pricing, project management and more will stagnate. This is the death knoll for law firms.
Thomson Reuters’ studies of dynamic law firms, alongside Jae Um’s exceptional analyses, demonstrate clearly the power in spending to grow. It is in investing, not cutting expenses, that lies the secret of rising market share and profits per partner. Client development, marketing, ESG and technology all propel the key metric – Revenue per Lawyer – which helps to predict future success. Similarly, investments in talent – not solely in compensation but in culture, development, equity, inclusion and the future of work – will dictate growth in the years ahead.
2. They avoid decisions
Just as self-preservation leads leaders to want to protect profits above all else, this same propensity often compels leaders to keep sensitive information close to the vest. Rather than broadcast concerns or share incomplete decisions, some leaders opt to gloss over ambiguity. They choose, instead, to project an air of confidence and avoid even hinting at the vulnerability – theirs personally or the firm’s – associated with not having “the” answer. In times of uncertainty, this move undermines authority and leads to less confidence, rather than more.
Newer generations, in particular, look to leaders for authenticity – a trait typically demonstrated when one’s words and behaviors are consistent and in alignment. Projecting an air of mystery or secrecy, or even plain failure to directly address the elephant in the room, yields the same result: mistrust and, at times, even resentment. This mindset is the antithesis of what many older generations learned and experienced. Previously, hierarchical systems reigned and authority stemmed from years of experience (sometimes irrespective of one’s character).
Transparency is the obvious antidote. Effective leaders are candid with others about what factors are at play, what the unknowns are and why decisions were made. They acknowledge limitations and suggest timebound or milestone-driven plans to reevaluate (e.g. we plan to revisit our decision in three months or when the next update is issued). Most importantly, they do not pretend to know all the answers (because everyone knows they don’t).
3. They slow strategic moves
A close cousin to the tendency to postpone investments and rein in spending, strategic goals often get the one-two heave in the face of ambiguity. It is easier to press pause than to make bold actions when the outcome is not 100% certain. The stigma of having to retrace steps or backtrack leads many law firms to avoid risk altogether. Similarly, the fear of wasting time or money tends to stymie action. This is a mistake.
While many firms will opt for the safe route, a savvy few will be upping their competitive game. These firms will outpace those who fail to act. Further, stagnation can lead talent – partners, associates and professional staff – to disengage, lose motivation and, over time, seek out greener pastures. While some strategic choices do bear reassessment as external factors shift, times of uncertainty present an opportunity to practice a shift in mindset.
Rather than steer clear of failure, wise leaders encourage others to accept missteps as learning opportunities and a vital part of the process. They adopt approaches to allow for small errors in pursuit of larger wins. For example, a law firm might pilot a leadership training program with a small group of mid-level partners and clients to build camaraderie and advance skills before offering the program broadly; or allow a task force to integrate an AI tool into their delivery model before rolling it out to the practice or firm.
Perhaps most importantly, those who effectively lead in times of uncertainty embrace change. They recognize their ability to refine strategy, update goals and get comfortable changing course will be the difference between arduous hours of fretting and the easy acceptance that “yes, it’s time to move left instead of right.” This approach to leadership also eases the anxiety and stress of others on the team and across the firm. Though building a culture and leadership team with this mindset will take time, effort and deliberate care, the payoff will be setting the firm up for continued success for years to come.
4. They don’t follow the data
Available forecasts indicate 2023 is going to be just fine, thank you very much (as evidenced in earlier paragraphs). Yet many leaders are making choices from a place of fear due to the uncertainty that lies ahead. While law firms will face difficult conversations, the truth is the economic environment supports continued growth, albeit at a much slower pace. The bitter pill to swallow will be accepting the preservation and growth of profits per equity partner may not, in fact, be what is right for the firm or the future. As any business owner knows, times of slower demand are opportunities – to retrench, make strategic choices and investments, and experiment. They know, too, this white space often comes at a cost, the trade-off being lower income in the short-term in order to shore up defenses and ramp up for growth in the long-run.
Instead of comparing 2023 performance to 2022 or 2021, savvy leaders will look to 2019 as the most reliable benchmark. Since the start of the pandemic, a confluence of events has conspired to challenge historical measures of performance, including key economic indicators. Perhaps more valuable than industry benchmarks, an analysis of internal trends in client work alongside external growth forecasts can yield insight into firm-specific pockets of growth. Law firms, too, can examine and assess areas where experience shows they are not optimizing performance and use this time to focus, rebuild and re-energize.
For example, those concerned about the Associate skills gap may use this time to double down on development instead of stressing billable hour requirements. Firms with clients complaining about the billing process could tackle process improvement now while work is steady rather than frenzied. Or partners frustrated by inefficient systems may solicit team participation in creating standard documents or other tools to streamline output.
Four ways to thrive in uncertainty
Uncertain times, though rocky, unpredictable and, at times, wildly uncomfortable, are also a source of renewal. And for the foreseeable future, many experts agree ambiguity and volatility are likely to be a regular companion. This reality demands leaders develop new tools and skills, learn ways to adapt and embrace – rather than rebuff – the inevitable impermanence that comes with disruption.
Make targeted investments with an eye to the horizon – rather than cutting spending, smart firms evaluate where dollars are being invested and set clear parameters around anticipated ROI in the short- and long-term. They are mindful of balancing short-term allocations with the strategic vision not for this year or next, but for years beyond.
Remain flexible – do not delay decisions, yet be willing to reconsider. Savvy leaders set specific timelines to assess progress and determine the best path forward. These checkpoints may be periodic (e.g., quarterly) or tied to key milestones or changes (e.g., when the government passes a significant tax bill or regulation). Critical to the success of this approach is transparent communication and open dialogue across the firm.
Practice strategic discipline – some of the best examples of successful law firm growth come from firms who honed their ability to stick to plan, irrespective of bumps along the road. These firms, locals who grew to super-regionals, regionals who are now global powerhouses, and boutiques with some of the most enviable profits per partner in the world, have staying power. They remain astute and agile while being disciplined enough to stay the course once the right goal is identified. This is a rare skill (especially in legal where many are so focused on this month’s billables they often cut bait long before allowing investments time to pay off).
Follow the data – rather than looking to headlines and eye-catching predictions, dig deeply into available data on the firm’s clients, pipeline, performance and external drivers to calculate the likely impact on performance. Unfortunately, far too few firms collect and track this information, let alone analyze and use it for competitive advantage. Relying on facts over feeling (e.g., fear) can help to combat doubts and spot opportunities others’ don’t see.