Trends identified in the recent 2018 Report on the State of the Legal Market, prepared by The Center for the Study of the Legal Profession at the Georgetown University Law Center and Thomson Reuters Legal Executive Institute and Peer Monitor, clearly support the premise that the profession has failed, for the most part, to fully recover from the 2008 – 2009 recession.
The following trends in question deal with key areas such as
Demand growth for law firm services was essentially flat in 2017 which continues a seven-year pattern (with the exception of a brief uptick in 2011 and a slightly negative turn in 2013).
For all lawyers, the current level of billable worked hours per month is some 13 total hours below the level at the beginning of 2007. That represents a total of 156 billable worked hours per year which, if multiplied by the average hourly worked rate for all lawyers in 2017 ($475), indicates that the decline in productivity over the past decade is costing firms about $74,100 per lawyer per year.
Collection realization as measured against standard rates continued to decline.
As a result of flat demand, declining productivity, and continuing downward pressure on realization rates, law firm profit margins on average across the market were essentially flat during 2017, and with the exception of a spike in 2011, the trend for profit margins has been slightly downward over the entire decade.
Turning to external trends a fundamental underpinning to the belief that a recession is coming is that expansions don’t last forever and when they end recessions tend to follow. Reportedly, there have only been two expansions that lasted as long as the current one we are in. To match the 120-month boom in the 1990s, we’d need the economy to keep growing past January 2019, an occurrence that The Wall Street Journal deems “a very tall order.” Clearly, the depth and shape of that recession will depend on the event triggering it, which is uncertainty that no one “crystal ball” is any better at accurately predicting.
The next indicator that a potential recession could be on the near-term horizon is the unprecedented period of deregulation that North America in general and the United States in particular, is going through. So what you might ask? A new working paper from the International Monetary Fund provides “empirical support” for the idea that large-scale deregulation generates a financial crisis. And we remember (or should as it was less than 10 years ago) what financial crisis triggers!
The last indicator that, if it doesn’t act as an indicator that all is not right with the world, certainly speaks to the likely exaggerated impact of the next recession, is the level of debt — at both a personal and government level. The USA economy and resulting debt levels play a significant role in the economic health of the continent. The credibility of figures is driven in large part by your perspective but recent statistics that are being quoted indicate that – a third of Americans “could not cover three months of expenses, even if they sold assets, dipped into retirement accounts, and asked friends and family for help”; The country’s debt burden as a share of the overall economic output” has skyrocketed from 63 to 104 percent; and “Interest rates remain near scratch,” which means the Feds can’t cut them to spur growth. And given recent tax cuts, the ability to use future tax cuts as stimuli has been significantly reduced.
While unable to even hazard an intelligent guess as to the likely timing of the next recession, it is not a huge risk for me to suggest it could be in the next 2 – 3 years, or sooner!
Having struggled through laying out disturbing trends that may well be the bearer of bad tidings, I finally get to the theme of the article – why would law firms not focus on some “recession proofing” exercises over the course of the next 12 – 24 months?
Beats me, especially if there is no downside to the firm! Ensuring your firm is fiscally healthy in good or bad times just seems to make good business sense.
The list of recession-proofing steps that firms should be contemplating and, where it makes sense, acting upon is not meant to be exhaustive (nor in order of importance or ease of execution) but rather are for the most part initiatives that will be viewed as positive in the current economic environment.
In encouraging firms to undertake recession proofing measures now, it is hoped that firms having done so will avoid Thomas Fuller’s concern that “we never know the worth of water till the well is dry.”
a CPA, CA and the Managing Director of Applied Strategies, Inc. Steve leverages 29 years of hands-on experience with law firm management combined with his professional financial training to offer small to medium-sized law firms, and individual lawyers, practical, pragmatic solutions to a wide range of law firm management issues.