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There’s More Tunnel at the End of the Tunnel: Law Firms Batten Down the Hatches and Prepare for a Difficult Coming Year

As the Great Recession Continues, the Need for Law Firms to Plan Carefully for the Challenges Ahead is Increasingly Critical

 

 

Is the sky falling, chicken little?

                                                                                                            Jerome Kowalski

                                                                                                        Kowalski & Associates

                                                                                                        October, 2010

            Late October brought some interesting, distressing, if not completely startling news for the economy as a whole and certainly for the legal profession.  Certainly, these recent reports require new inputs in to the algorithms employed by management.    

            We previously reported on steps taken by law firms to enhance their profitability by, among other things, establishing law firm subsidiaries which complement their principal business model. We also spoke of new models of professional staffing which are emerging.  Much heavier lifting now is required: Now, added to this mix is that more legal outsourcing firms are working hard to compete directly with law firms.  While I personally tend to agree with the assessment of Pete Kalis that LPO’s may very well be simply be a “gnat on an elephant’s ear,” firms which derive material portions of their income from corporate work which in large measure can be characterized as commoditized will doubtless face both added competition and pressure on rates and fees charged to clients.

             An additional component to the evolving calculus is the results of the survey recently conducted by Hildebrandt of some 252 corporate general counsel of major corporations in 26 industries from which Hildebrandt concluded that these general counsel expected that their budgets for outside counsel will be reduced by between 1 and 2%.   This factor must be evaluated very carefully particularly where law firm fixed costs in certain areas not under a law firm’s control (such as rent escalations, increased health care costs, costs of goods and services and the like) will likely rise at a higher rate.

          Congressional elections are days away. No observer expects anything but a strong Republican resurgence. At the same time, every leading economist (see, for example some of Paul Krugman’s views on the subject), agrees that the only way to crawl out of The Great Recession at anything other than a snail’s pace requires a new massive federal expenditure for public works projects, serious federal investments in various economic stimuli and increases in tax.  Doubtless, the new equilibrium in the legislative branch will simply preclude such spending.  Thus, if these prognostications (from which there appear to be no dissenters) prove correct, we are all in for an extended long haul of economic decline.

           The current mortgage foreclosure crisis adds a further conundrum:  In order for banks to improve their capital bases and lending capacity, reserves set aside for mortgage loans default need to be converted to bank assets in the form of REO’s (Real Estate Owned).  Recent heightened judicial scrutiny of such proceedings, the “hide and seek” banks and loan servicers are required to go through right now (“Where’s the original mortgage document?  Anybody have a clue?”), state and federal regulatory and threatened criminal prosecutions have already slowed the process and continues to pinch banks’ ability to make loans given the continued  uncertainty of their own capital bases and lending limits.

            The profession’s response must be something other than “other than that, Mrs. Lincoln, how did you enjoy the play?”

              2009 may have caught some in the profession by surprise. The reactions by too many law firm leaders at that time were too much whack-a-mole.” The sense too often was let me knock down this emerging mole and then everything will be fine.  There should be no surprises about what Q4 and much of 2011 will bring: There’s more tunnel at the end of the tunnel.

                Having already cut to the bone, options are becoming more limited:  Here are some steps which must be taken:

            Some managing partners have already learned to adjust in some measure to these new realities: http://www.lawjobs.com/newsandviews/LawArticle.jsp?hubtype=News&id=1202473958543&src=EMC-Email&et=editorial&bu=Law.com&pt=LAWCOM%20Newswire&cn=nw20101027&kw=Managing%20Partners%20Have%20Positive%20Outlook%2C%20Survey%20Shows&slreturn=1&hbxlogin=1 

             An interesting, but surely irrelevant footnote:  Simmonds and Simmonds of England is now requiring that each applicant undergo a psychological evaluation as part of the screening progress. There are without doubt a great number of punch lines here.  Those of you who are devotees of The New Yorker are familiar with that magazine’s weekly contest appearing on the last page of each edition in which a cartoon, sans a caption, is presented and the magazine conducts a contest in which readers are invited to submit clever captions. Consider this the same challenge.

© Jerome Kowalski, 2010.  All Rights Reserved.

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3 Responses

  1. Jerry:

    You are “spot on” as the Brits would say. As optimistic as we all want (and need) to be, I’m afraid it isn’t over yet. Back in August 2008, I wrote in an article entitled, Managing Through A Prolonger Downturn that . . .

    Conventional wisdom, publicly espoused by a number of market watchers and legal consultants is that: “The recession will be intense, but short. Everyone wants to get back to normal. Short term, the backlog of real estate will be sold as owners accept losses; banks will end the credit crunch; layoffs will make companies more efficient.”

    My view is far little less confident. I believe that unlike past experiences, this recession isn’t being caused by a downward spiral in a few isolated industries. It started with the burst of a protracted housing bubble and then metastasized into a full-blown credit crunch, eventually destabilizing the entire financial system. Therefore, I submit that for the next five years, every time you think it’s safe to get up and dust yourself off from this downturn, every time you feel like you’ve endured the worst of it, another piece of news is going to come along to freshly bludgeon you. This time the economic slowdown is going to be a lot different and, in many ways, a hell of a lot tougher.

    Whether I’m right or wrong is probably immaterial. What is relevant is whether your firm is prepared for a worst-case scenario. What is worth acknowledging is that this economic downturn could present an opportunity to introduce meaningful change, when change is not normally an easy subject to discuss among partners.

    Today, I wonder whether my claiming a ‘five year destabilization’ was too optimistic. Keep us all posted on what you’re seeing.

    regards,
    Patrick

  2. Thank you for your comment from across the pond. In response to your inquiry, moments before your comment was posted, The Washington Post issued a bulletin announcing the resukts of a recent poll which concludes that most Americans are concerned about having enough money to pay their rents and mortgages: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/27/AR2010102703683.html?wpisrc=nl_natlalert

  3. The ‘gnat’ as described by K&L Gates may well hurt them soon. Small law firms equipped/armed/assisted by these LPO’s can take a competitive stand against larger law firms. The tides may well turn in the legal industry against mega law firms. The smaller law firms assisted by an LPO will have both the quality and the quantity to reach new heights. The gnat may just de-capacitate the elephant!
    For more on how and why LPO can be good alternative for small or medium law firms can be read at my blog:
    http://megalpo.blogspot.com/2010/10/alternative-to-mergers-can-mid-level.html

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