The Australian economy is in serious trouble, and it is going to get a lot worse.
The economic consequences of the pandemic are certain to be more profound than the health consequences. Government lifelines of support such as JobKeeper are now being phased out rather than abruptly terminated, but even so they are insufficient in themselves to retard the rate of economic slowdown now occurring.
The Government expects the official jobless rate to exceed 9% by Christmas, but the true rate will be much higher than the peak unemployment rate of 11.2% reached in the 1990s recession.1 Back then, it took seven years before the unemployment rate fell below 7%. Based on this experience, it is difficult to see the Australian economy recovering for many years.
It is inevitable that the Queensland economy will be seriously impacted and the legal industry will not be exempt from the very painful restructuring that will follow.
Businesses need to prepare survival plans rather than strategic plans. These plans need to map out the strategies necessary to survive the severe economic challenges which lie ahead. It is inevitable that many businesses will fail. This has already started.
The real difficulty for businesses is that they are unable to predict when this economic lockdown will bottom out. It now appears unlikely before Christmas. Consequently businesses need to be very conservative in their projections.
Major issues to consider are:
In times of crisis, leadership needs to be both visible and sensitive. Visibility requires regular and honest communications across the firm about how the firm is faring and actions to be taken. You might consider revealing firm revenues for the January-June period last year against the same period this year to demonstrate to all that this pandemic is causing real pain and that some hard decisions will be necessary.
Areas of practice
Critically assess the areas of law in which the firm practises. You need to ensure there is a robust and realistic assessment of each area’s prospects for profitability. The mean profit before tax is 25%, which requires a 65% gross profit. You need to calculate the gross profit by area of practice.
If the gross profit is less than 55% for any area, then you need to question the wisdom of persisting in that area. A disciplined culling of low-profit areas should reduce costs and free up time and resources to pursue the more profitable work.
Beware of price competition
Margins are likely to come under severe pressure as law firms compete on price for a diminishing market. Over the past five years there has been an average 38% increase in the number of practitioners in practices with fewer than 19 solicitors.2 When confronted with a rapidly dwindling practice, principals of smaller practices are likely to engage in price competition. Indeed, their clients may ask for it.
The clients of most smaller firms tend to choose based largely on convenience and price, so practices cannot rely on customer loyalty. Recognising this, principals should touch base with their clients to see how they are going. A bit of empathy would be appreciated.
Trim overheads aggressively
You will need to trim every possible expense. Since labour is the greatest cost, staffing levels must be closely scrutinised. The recent work-from-home experience of law firms is likely to have demonstrated that the existing level of support staff is no longer justified as solicitors, especially the more senior ones, have become more self-sufficient using technology to service their clients.
Consequently, many support staff may now be unnecessary. If you have reached this conclusion, then now is the time for that awkward but very necessary conversation. But do not trim staff progressively or you face a significant loss of morale. Far better to do it all at once and then advise that that’s it.
Focus on productivity
Now is not the time to recruit graduates or very junior lawyers. Your fee earners need to be producing at least five chargeable hours per day with minimum supervision. If they are not, then you need to assess whether you really need them.
Do you need the current office space?
The work-from-home experience has demonstrated that some staff can deliver acceptable levels of productivity from home allowing firms to potentially reduce their bricks and mortar footprint. You could ask the landlord whether they would consider reducing the office space in the short term if you extended the lease by another two or three years.
The economy is in serious recession and it will take two to three years to recover. Law firms need to recognise the danger and act now if they are to survive.
Many partners are likely to push back against the necessary changes being adopted.
David Maister, the noted professional services author, makes a salient observation about partner discomfort with change: “Unfortunately, enhancing the competitiveness of the existing practice will inevitably require changes in the behaviour of the existing partners. In the real world of professional firms these changes are potentially disruptive, uncomfortable, contentious and political.”3
I acknowledge that this article is rather grim, but I believe we are deluding ourselves if we think it will all revert to normal within 12 to 18 months. It must get worse before it can get better. I am CEO of Kemp Law and, in addition to being a law firm CEO/GM for over 20 years, my qualifications include BEc, MBA, GAICD, and I was an insolvency practitioner with one of the big four chartered accounting firms for 12 years before joining law.
1 Adam Creighton, Economics Editor, The Australian, 25-26 July 2020, p13.
2 QLS annual reports 2015-19.
3 David Maister (1993), Managing the Professional Service Firm, Free Press, New York, page 224.