This article was co-written with Janet Stanton, Partner.

As you know, we have recently published our thoughts on the likelihood of a recession in the United States:  Reasonably high, in a nutshell.  We won’t rehearse our reasoning here in detail, but the root cause would be the Fed tightening interest rates to fight off the country’s high inflation rate—currently above any figures for the past 40 years.  This is by no means the first time the Fed has adopted such a policy, which is a standby in their macroeconomic management toolbox.  Alas, their track record of being able to engineer a “soft landing” (cutting inflation without sparking a recession) is extremely poor, and by some accounts has been successful zero times.

That said, law firms of all sizes, practice specialties, and market footprints have been through many recessions and it’s possible in this case to learn from history.

If we had to distill that learning into a single overarching observation, it would be that having a plan going into an economic downturn will serve you far better than waiting until the ceiling is falling in on you, revenues are shrinking and client mandates are slimming down or disappearing altogether.  (And we might add that the hoary counsel to diversify into countercyclical practice areas, and all we be well, is massively over-rated.)

We are big fans of scenario planning on general principles (see, e.g., Tomorrowland), and if one fears a recession may be on the horizon, it becomes particularly urgent to draw up rough plans on how to react—understanding full well that your predictions can never be precise and events inevitably play out in unforeseen ways.  As General Eisenhower allegedly remarked, “Plans are useless but planning is essential.”

What might such plans entail?

Start here

An arithmetic truism is that if revenues in a for-profit enterprise fall, profits will follow immediately—unless you can cut expenses to a largely or wholly off-setting extent.

Another truism of scenario planning in the event of a recession is that no one has any idea how severe or long-lasting the economic downturn will be.  And the best that can be said for the consensus of experts going into such events is that they will be wrong, often gravely so.  Therefore, we counsel drawing up at least two, but no more than three, different scenarios.  You may think of them as “bad and worse” or “not so very bad, bad, and really bad.”  To put numbers to them, we might suggest for starters revenue drops of 5%, 10%, and 20%.

A simple, but also simplistic, next step would be to instruct the leaders of the firm’s key cost centers (practice groups, offices, functional/support departments) to draw up plans for cutting their expenses by the same percentages.  The defect in that model is that it’s far too blunt an instrument.  Not every major area of the firm will be affected identically, for starters, but more significant by far is that given the history of human and organizational behavior that has accumulated across the firm since the last downturn, deadwood, fluff, and extraneous activities will have encrusted at different rates.

Understanding that all areas will not be affected equally, it is nonetheless, good business discipline for the firm’s leaders to be thinking about possible upsides and downsides on a regular basis.  This is SOP in the corporate world; business unit directors have alternate scenarios at the ready so that as situations change, they can respond nimbly.

Be selective

This brings us to our second major recommendation:  Take the opportunity of potential dark storm clouds to not “cut” indiscriminately across the board, but to selectively reallocate resources and, in particular, to terminate or stop allocating investment into activities that are no longer rising to the challenges of carrying their own weight.  Prune selectively.

And not to be delicate about it: This squarely includes underperforming people, be they lawyers, business professionals, or staff.  [1]

We don’t need to tell you that this part of the scenario planning will be unpleasant—and worse should you decide the firm’s longer-term best interests require you to act on it—but in our experience it liberates the high-performing individuals and subtly but powerfully enhances the tonality and energy within the firm.  And as small consolation, a recessionary environment provides firm leadership some “air cover” for taking such measures.

The status quo does not deserve, and should not have, any special presumptions in its favor

Another critical perspective to keep top-of-mind during the cost-cutting exercise is one lawyers more than most people strenuously resist: That is the imperative of adopting and employing the “clean sheet of paper” mindset.  Stated another way, eliminate any lingering instinct that the status quo enjoys presumptive preferential treatment.  It should enjoy no such thing.

Decades ago, this approach was known as “zero-based budgeting,” and while the way it was largely practiced then (with massive incompetence and hypocrisy) gave it a bad name, the insight was and is correct.

Discredited terminology aside, the principle underlying the practice is profoundly correct:  Arguments in favor of maintaining the status quo should enjoy no tacit presumptions in their favor and should be held to the same high standards of rigor and skepticism as are (rightly) applied to arguments in favor of change and reform.[2]

You have been observing proper hygiene all along, haven’t you?

We’re not going to insult your intelligence (around here, we deem that attitude towards our readers best avoided), but you have been:

• rationalizing secretary/lawyer ratios;
• optimizing total occupied space and space usage;
• bringing your document management and financial control systems into the 21st 20th Century;
• institutionalizing unflinching rigor around getting bills out in < 30 days;
• delegating bill collection reminder ticklers to your firm’s accounts receivable people talking to your clients’ accounts payable people;
• negotiating quantity discounts/bulk purchases for all your daily office supplies;
• asking vendors for prepay or quick pay disounts;
• and, in general, reminding yourself that recurring expenses set up literally or figuratively on autopay deserve just as much scrutiny as one-offs.

Right?

RIght.

Explain what you’re going to do, explain what you’re doing, and explain what you did

Finally, communicate, communicate, and communicate more.  Explain to people why the stem-to-stern review is being undertaken, what (impartial) standards and principles are being applied, and the actions those analyses indicate must be undertaken.  You may not be able to enlist everyone’s assent this way—we won’t even discuss the views of those identified as material underperformers—but at least you can earn everyone’s respect and perhaps a grudging acknowledgment that the firm will be a better place for the hard decisions taken.

Nothing, at day’s end, can insulate your firm from or immunize it from a nationwide or global recession.  Remember:  In the long run, you can only do as well as your clients.  But with some prudent and thoughtful planning, and having garnered in advance broad support for doing what may be painful in the short run for the sake of the firm, the partners and associates, and the business professionals (did we mention your clients themselves?)  in the long run, you should be as well set as any of your competitors and better than most.

Recessions are no fun, but you didn’t have to volunteer or agree to being in firm leadership, and this is what duty and stewardship entail.  You raised your hand for this, remember?

Long term view: no sentimentality: no favoritism: rational decisions firmly grounded in solid data.

And good luck!  We’re here if you need us.

Courtesy Unsplash

[1] Both Altman Weil and Thomson Reuters report that under-performing lawyers are viewed as the single greatest risk to law firm profitability.

[2] A droll friend once asked how smart it would be to follow a doctor who advised his overweight patients to stay that way since they didn’t appear disabled yet.