The Biglaw Recession Playbook – Above the LawAbove the Legislation

If you’re reading this, I’ll bet a stack of Hamiltons you’re feeling the jitters about an impending recession. Given that recessions are generally defined retroactively by two successive quarters of decline in GDP, real income, and consumer spending, it’s possible we’re in one right now and don’t even know it yet.

There are plenty of reasons people are expecting the economy to continue slowing down for the foreseeable future. On the consumer side of the economy, inflation is at 8.6%, and consumers are responding by cutting down on their discretionary spending. Gas prices are going through the roof, topping $8 at one California station.

With Federal Reserve Chairman Jerome Powell announcing a .75-point rate hike to the fed funds rate, consumer loan and mortgage rates will likely continue to rise. Even before Powell’s announcement, mortgage loan application activity recently hit a 22-year low. And while the jobless rate has been relatively low over the past year, even that took a gigantic leap upward last week.

All of this is rippling through the markets. Yesterday, the Dow fell below 30,000, and the S&P 500 is down 20% over the past six months — moving it into “bear market territory.” Investors are feeling pain. Workers are concerned about their 401(k)s and retirement dates.

The boom of the roaring 2020s seems to have come to a grinding halt. Nobody, nobody, can say precisely where this is going. The stock market has predicted nine of the past five recessions, as the old joke goes. But recessions can be self-fulfilling prophecies, fueled by expectation, and large swaths of the American economy, including 85% of its CFOs, are buckling down for a coming storm.

Now What?

Even if fears of an overall economic recession turn out to be overblown, there’s still every reason to prepare your practice and your firm to weather a downturn in business. Our industry still faces all the same headwinds it’s been facing for the past decade, including increased competition from nontraditional legal service providers and decreasing client appetite for outside counsel. It was recently reported that, for the first time in known legal history, over 50% of in-house counsel spending has been remaining in-house, rather than being spent on outside counsel. That’s a drastic downturn from prior norms of 30%-40% remaining in-house and the rest going to firms like ours. Biglaw practices need to have game plans in place if their client bases dwindle or fall away. So what is a law firm executive committee to do to make sure their firm comes out the other side not just intact, but better than ever?

Understand Your Vulnerable Areas

The first step is understanding where you can get hurt the most, and how much any one blow can hurt you. Robust companies can handle setbacks without being at risk of going under, but that’s not always how businesses work, especially in the legal field.

Does your book of business rely heavily on one client? Is there a single practice group that’s responsible for most of your firm’s profitability? Figure out right now where your firm can least afford to take a hit, and then do some forecasting and planning. Prepare a budget that assumes your biggest client drops you, or carves off half its matters to send somewhere else. If losing your biggest client still leaves you in good shape, assume the next-biggest leaves, too. Model what would need to happen if your most successful practice group’s productivity plummets. Keep pulling pieces out of the hypothetical Jenga tower until it falls over. When you’re done, you’ll have a drastically better understanding of what really keeps the lights on in your office, what you need to prioritize, and what you can do to stop the bleeding if things get ugly.


Once you have your arms around what it is your firm relies on, you’ll naturally start seeing the gaps in your portfolio of work that you can start to plug. If your firm relies heavily on practices that ebb and flow with the business cycle, such as M&A or real estate, try to find countercyclical or evergreen practices to fold in or build up. Rainmaking bankruptcy attorneys turn into rock stars during downturns, and less flashy but steady practices like tax law are the ones that make sure a firm always stays afloat. Not every practice in a healthy, robust firm is going to be teeming with work all the time, and that’s okay. Value those steady relievers that you know will step up when conditions change. Balance your firm’s practice mix and those speed bumps in the economy will feel a lot less impactful.

Master Your Overhead

The real problem of a recession isn’t just that your firm’s revenue drops; it’s that your overhead stays steady. Preventing overhead from creeping up over time is the perpetual task of every law firm leader. Keeping a rein on overhead today is essential to surviving tomorrow’s troubles.

I’ve written before in this space about the Tragedy of the Law Firm Commons, a problem that arises when the benefits of an overhead expense are enjoyed by a single partner or practice group, but the cost of that overhead is split evenly across the partnership. Take a firm with 100 partners where all overhead is split evenly. Imagine now that you’re one of those partners, and you’re wondering whether to take on a new paralegal, but you’re not sure you have enough work to keep the new hire fully occupied. If it turns out that paralegal is unprofitable, with a shared overhead you’ll only have to pay 1% of their potential loss because your other partners will pay for the rest. Having your partners subsidize 99% of a loss in exchange for a little relief or ability to cut out early on a Friday is a smokin’ deal for you, right? But your other partners have the same incentives to drive up overhead to their personal benefit as you do. This sort of system can leave a firm with 100 partners, 1,000 paralegals, and 0 profit.

The way to avoid this sort of problem is to allocate overhead as best the firm can based on major resources a partner actually uses. If an associate works 50% with a partner, that partner should take on 50% of that associate’s overhead. It’ll never be a perfect system, and many budget line items like office supplies should remain evenly split; it’s not worth tracking individual paperclips and pens. Similarly, most administrative expenses should be shared evenly because the firm can’t function without HR, finance, and IS departments — even if individual utilization varies. But if you make partners accountable for major aberrational expenses, there will be more dollars left over to keep everyone if that recession materializes.

Think Carefully About Dragging People Onsite

Speaking of overhead, there’s one component of it that warrants its own discussion: real estate. Next to staff, it’s usually a firm’s biggest expense. Law firms have a golden opportunity to keep those costs low going forward as remote work becomes more prevalent. Embracing remote work can reduce a firm’s need for expensive physical space, while also encouraging teams to use efficient electronic tools instead of expensive and slow paper-based workflows. Onsite workers also tend to lead to increased meal and meeting expenses.

Embracing remote work is also great from a retention standpoint. Study after study after study shows that workers want flexibility. In fact, remote work is increasingly seen as a standard, not a perk. As the American Lawyer recently put it, if you want to thin your firm’s headcount, just mandate your attorneys spend three or more days a week in-office. If that sounds like it could be an effective strategy in a volatile economy where you’re looking to reduce cost, think again. Because it will probably be your highest performers that bolt — leaving you with lots of expensive space and the future of your firm gone.

Start Leading Today

Like I said earlier, recessions are in many ways creatures of expectation. That applies to your firm just as much as it does the economy at large. Your partners and teammates are likely sharing the same concerns you are, so get out in front of the issue and make sure they know you’re proactively planning for this. Be up front about the strategizing and analysis you’re going through on a firm-wide basis, and ask your partners to do the same for their individual practices. Having a prepared, coordinated partnership that’s ready to make bold decisions in the face of adversity will set your firm up to not just survive an economic downturn, but to come out the other side stronger than ever.

The competition can sit and wait for the economic winds to push them somewhere new, but by being a strong and active leader today, your firm can be united in charting its own course.

GoodnowJames Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created and run a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at [email protected].