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Surviving the downturn

While global markets tank, big Canadian law firms are proving resilient so far

Originally published in The Lawyers Weekly

The world’s economy is faltering and some lawyers wonder if their businesses might follow suit.

While major Canadian firms are keeping a stiff upper lip, cracks are beginning to show.

Fraser Milner Casgrain LLP quietly laid off about 25 staff and 10 associates from its workforce of approximately 550 lawyers and 850 staff this fall, but has also hired six lawyers since late this summer.And certain American law firms have already made headlines with their reactions in this crisis. Heller Ehrman LLP shut its doors after 118 years in business. International firm White & Case is scaling back its holiday party after laying off 70 lawyers and 100 staff.

Michel Brunet, Fraser Milner’s chair and CEO, attributes the firms cuts to three factors: the annual budget process, the firm’s strategic plan and the economic downturn. “A number of associates were let go,” Brunet said. “This is not unusual at this time of year.”

Brunet admitted “the economic downturn has had an impact,” although litigation and labour practices, among others, are busy across the country, he added. He expects several other practices, such as insolvency and restructuring, to pick up as well.

How law firms perform strategic planning, though, may change for good during the crisis. “The legal profession globally is in a comfort zone,” said consultant Michael Short of Hildebrandt International, Inc. “All of a sudden we say, ‘Take a look at the business model, do things differently.’”

Short is referring to Hildebrandt’s October 2008 special client advisory (available as a free download from Hildebrandt.com) in which the business consultancy examines the current economic crisis, its fallout for the legal community and what firms need to do to now.

Meanwhile, Bay Street’s stoicism seems to stem from several sources. “Legal business traditionally experiences a bit of a lag after downturns and upturns in the economy, particularly downturns,” offered Andrew Fleming, a Toronto-based business law specialist and senior partner with Ogilvy Renault LLP.

“We have not seen a significant overall decrease in the amount of business that we’re doing,” Fleming added.

Certain Canadian firms paint high levels of specialization and leveraging endemic to teetering US firms as key vulnerabilities.

Also, law is immune — somewhat — to economic fluctuations. “From the client’s perspective, 2009 will not be as solid a year as 2008,” Short said, “but the demand side for services will not change.”

Inelastic demand however, does not mean business as usual for law firms.

“The current downturn in the economy is heavily focused in places other than Canada, particularly in the United States, and now we’re seeing an effect in Europe and Asia,” said Fleming.

“But a significant portion of Canada’s GNP is trade with the United States. While we may not have caused this disaster, we will probably feel its effects.”

Clients in difficulty may exert downward pressure on fees and increase payment cycles. Yet solidifying long-term client relationships could prove strategically worthwhile, even if rates remain flat.

Lower confidence also seems to have swum upstream from clients and firms. “It’s very subtle, but there is a sea change in terms of who is pursuing who,” noticed Fleming at Ogilvy Renault’s student interviews earlier this fall.

“I think there is at least a perception in the marketplace that the halcyon days of students demanding all sorts of things are probably over.

“The key is not to overreact, fire a whole bunch of people in bad times, hire a whole bunch of people in good times,” Fleming continued. “That’s a very expensive way of doing business.”

“You have to keep your talent pool growing,” insisted senior corporate partner Alan Bell of Bennett Jones LLP. “Even if there’s a little less work on the files you have, there’s more opportunity to teach.

“Yes, that’s more costly, since you’re absorbing that increased teaching time, but it is an invaluable experience for younger associates.”

Another potential faux pas is to assign lawyers from underperforming practice areas to help the firm gain a toehold in other areas where demand remains strong. “You can’t start a practice on reallocation,” Bell said. “You can only supplement an established practice if you expect more work coming in.”

More work might come from the very crisis that precipitated the Hildebrandt advisory. Law firms in Washington and New York may see an uptick in business from widely anticipated U.S. government regulations meant to prevent the behaviour believed to have caused the current economic crisis. As U.S. firms comply with new regulations, they may impose similar “compliance” on their suppliers from other countries who, in turn, will need outside counsel to deal with a new normal.

Meanwhile, maintaining an even keel based on a long-term business outlook appears to be the most commonly shared advice for law firms that expect their financial results to slump.

“Our challenge this year will be to get a realistic revenue budget,” said Fleming. “It’s likely to be very conservative going forward. We don’t want to find ourselves in a downturn having raised or kept expectations high and have them shattered as a result of the downturn in the economy.”

Economic theory states that a receding economy is a great time to pick up bargains so, perhaps unsurprisingly, not all Canadian law firms sound like bears. At Bennett Jones, the bull still snorts and paws the ground according to Bell. “We are still very much committed to expansion, identifying opportunities and acting on them,” he said.

The Hildebrandt advisory offers some guidance. In the immediate future, law firms need to make sure collections are set for 2008 and sources of credit are available in 2009. Meanwhile, they can pare expenses as long as they don’t adversely affect service.

Above all, firms need to communicate frequently both within their own walls and with their clients. “Silence from firm leaders at critical times like the present will inevitably be interpreted as a harbinger of certain disaster,” the report stated.

“It will be an up-and-down recovery,” Short said. “It isn’t a comfortable place, but firms that take a long-term perspective and don’t react to short-term trends are the ones that will be positioned to really thrive on the other side of this.”