Loans to law firms used to be a “no brainer” until some spectacular failures created losses in the millions. Now, law firms are watched and analyzed carefully by banks. An article entitled “Consultant Has ‘Somewhat Robust’ Watch List of Law Firms in Possible Danger” which was appeared in ABA Journal Law News Now, included a video of an interview of Dan DiPietro, chairman of the Law Firm Group at Citi Private Bank. I was impressed with the interview, and the fact that Dan uses “real” indicators of whether a law firm is in trouble, rather than just focus on the P&L. He knows that underbidding jobs, partner defections, and excess capacity are all surer advance indicators that a law firm is heading for the fiscal cliff’s edge. He rightly recognizes that only later do these trends reflect in the bottom line.
His view is that transactional work is strong in a few industries, but otherwise is mostly still flat, causing financial hardship at large law firms. And that trend will continue for the foreseeable future. Although his focus seems to be exclusively with “BigLaw” I can confirm that this trend is affecting mid-size firms as well. Especially because of increased competitive pressure from larger firms now focusing marketing attention on smaller clients than normal, in an attempt to increase utilization of professional staff.
I convey these increasing competition principles to attorneys by using a fishing analogy. Think of the BigLaw firms as the deep sea fishermen. They’re after the big scores. But when their favorite locales are overfished, they look for new spots. Next thing you know, they invade the waters formerly favored exclusively by the mid-size firms. Smaller fish, but still reasonable size and quantity. They make up for the size difference in fishing for greater volume. So what do the smaller firms have to do, faced with better-equipped increased competition that outclasses their operations? They come and fish off the local pier of small-firm. Firms that never expected competition; firms that always felt that larger firms were not interested in their clients. They are now facing increased and daunting competition.
When you know that you are or will shortly face steep competition where there was little or none before, it’s time to bring on your A-game. Excellent service — defined from the perspective of the client, not the law firm — will be the number one determining factor of who gets or keeps the client. Cost management and innovative pricing strategies will be another. The days of clients rewarding inefficiencies are over. If you haven’t taken quality-control measures to leverage your firm with knowledge management and workflow innovations, you will be unable to remain competitive.