Managing through uncertainty: Law firm business leaders discuss the challenge of falling demand and rising expenses

June 05, 2023

Despite growing revenues, law firms have become more expensive to operate and less profitable than 2022. Williams Lea CEO, Clare Hart joined more than 15 law firm COOs and C-level leaders at Sandpiper Partners’ 2023 COO/CFO Roundtable on Business and Financial Management for a timely discussion on top-of-mind issues including responding to shrinking demand, managing expenses and partner expectations, addressing hybrid working and return to office challenges, and evaluating the impact of AI on law firm operations.

Here are the top takeaways from the event:

To strike the right balance between a firm’s desire for growth and shrinking market demand, put the client first

The panelists and audience all agreed that demand for legal services has decreased, and firms are taking new approaches to meet this challenge. Panelists suggested that taking a client-centric approach is key to capture a greater share of a shrinking market. Some areas of focus include more investment in business development, increased in-person client meetings, event participation and delivering thought leadership. “Business development was easier the last few years,” said one panelist. “Now expenses are on the upswing, travel expenses are going up, but we must find ways, new ways to connect with our clients.” Finding ways to “pay for” BD investment is challenging, but, as one panelist noted, “It’s important that we don’t stop investing in the things that will deliver for us when the market rebounds.”

Expense management is not just a cost cutting exercise, it’s a strategic opportunity

The panelists discussed how, when and why firms should cut expenses to maintain profitability, focusing on the three largest areas: Human capital, operating expenses and strategic investment.

While the quick reaction to a downturn is cost cutting, there’s an opportunity for greater strategic impact. “Expense management is not just cutting stuff,” said one panelist. Firms can use this as an opportunity to look at areas that they know are inefficient but have not addressed to avoid rocking the boat. “These are the times you can touch the ‘third rail’ and look at things that have historically been much more challenging for the firm to impact,” they added.

One key lever to control costs is outsourcing. “Look to outsourcing anywhere and everywhere you can,” said one global law firm COO. Options discussed included sending work to a firm’s offshore delivery centers, centralizing it in low-cost onshore centers, or partnering with a business services outsourcer. Clare Hart, Williams Lea’s CEO, shared insight into where its law firm clients are focusing. “We’ve seen an increase in firms looking to outsource support for their administrative and financial functions. Document processing and secretarial as well as support for e-billing and outside counsel guidelines compliance are top of mind.”

Effective expense management requires transparency and clear communication between the business leaders and firm partnership. Said one panelist, “Partner transparency is key. People don’t like surprises. You need to share the good and the bad.” At the same time, let the partners and associates know how they can positively impact the situation. “Help them be a part of the solution, give them tangible suggestions they can act on, such as increasing client meetings or cross-selling across practice areas,” they added.

If we build it, will they come… back to the office?

The return to office/hybrid working conundrum remains unresolved, or as one panelist summarized, “The legal industry is based on precedent. Right now, there is no precedent.” The panelists reported an array of guidance and policies their firms are using to encourage lawyers and business professionals to return to offices, from mandating three days in office per week to establishing weekly anchor days by practice group or role. One firm leader said their firm was investigating a “Frequent flyer type program… the more you are in the office the more perks you are eligible to receive.”  A global law firm COO reported different policies by market. “Our firm is matching the market and deciding on an office-by-office basis,” they said.

Many of the panelists’ firms are planning or have recently moved or reconfigured offices in large cities to try to attract more of their teams back to the office, although they agreed it’s much more challenging in “hard commute” cities. “Those extra two to three hours burned commuting to the office could be billable hours,” said one panelist. “It’s really hard for our lawyers to go back to the way it was.”

While some firms are reducing their footprint and adapting space for more collaboration and flexibility, one panelist warned, “You need to be careful you are building the space to support patterns. If everyone comes in on the same day, will you have enough room for them?”

Artificial intelligence is ubiquitous but poses more questions than answers

While the focus on Artificial Intelligence (AI) for law firms has largely been on its impact on legal work, AI poses an array of challenges for law firm business leaders. The panel contemplated a range of issues, from what tools to invest in to the increased cyber and data security risks.

AI is not new to law firms. “We’ve been using predictive AI in e-discovery for years,” said one panelist. “Now, ChatGPT and generative AI are here, and there is lots of noise… we need to strike a balance between evaluating and experimenting. We need an extra focus on value when deciding which AI tools and which use cases.” Clare Hart brought a service provider perspective: “Traditional AI drives efficiency and now ChatGPT raises the bar. It’s ‘consumerized’ AI but it has limitations. We need to continually educate ourselves and our clients on where AI can drive value.”

Firms should take a careful approach to both AI policies and investments. On the policy side, one panelist noted, “We could try to regulate it [AI use] but that ship has sailed. People are going to use it. We need an extra focus on quality control and risk management.”

The risks of AI, especially to cyber security, were top-of-mind for the panelists. A quick poll of the panelists and the audience revealed very few firms had moved to the cloud, and AI is largely cloud-based, or as a panelist put it, “AI is in the cloud and to the extent you are testing or using it, there is increased risk… Law firms are perfect targets for cyber attacks as they have troves of valuable data.” While law firm data might be a “hostage worth taking,” Clare Hart pointed out that when considering the “safety of data” in the cloud, law firms should consider that providers such as AWS and Microsoft’s Azure invest significantly more in cybersecurity than even the largest law firms.

“The technology is changing so rapidly,” added one panelist, “a cloud journey is risky if you don’t get it right. You need to invest in the proper infrastructure, data and AI specialists…this is an area where you should carefully look at whether to build or buy. Either way, getting this right will require investment and you should expect to pay for it.”

Find out more on how Williams Lea is using AI and automation to drive productivity and improve quality. Learn more about our ENGAGE digital platform, our workflow and analytics tool, and our recently launched LogoCloud, a Software as a Service (SaaS) platform that automates critical elements of presentation and pitchbook creation.