A global downturn will mean smaller businesses will face challenges greater than they ever have before, according to Amanda Little & Associates director Amanda Little.

“From staff and skill shortages to exponential staff wage hikes to the general costs of running a law firm increasing rapidly to the rising cost of living, the economic environment for small and boutique practices feels unstable and requires innovation, a can-do attitude and fortitude to maintain or grow a firm,” she said.  

“If the headlines are correct and a recession comes to pass as predicted, any challenges that small and boutique firms are currently facing will be amplified so it is essential that they start preparing for a possible recession now.”

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Whilst many businesses’ knee-jerk reaction to tough economic times is to cut costs, boutique firms that do so may be setting themselves up for failure, according to FAL Lawyers managing partner Peter Francis — who told Lawyers Weekly that smaller firms should instead focus on service offerings that will stand the test of a recession.

“Boutique law firms have several significant fixed costs — rent, salaries, insurance and the like — it costs money to run a law firm, and there’s no getting around that. Firms need to be brave and diversify or up-skill in areas of law that will be required in a recession,” he said.

“To succeed during and after a recession, law firms should shift their focus to markets that will remain in demand, such as education, health, and government. Those industries also offer opportunities to future-proof your law practice.”  

Managing partner of Travis Schultz & Partners, Travis Schultz, echoed a similar sentiment — and said that different specialities of legal practice are likely to suffer more than others.

“As Paul Keating famously remarked, there are times when a recession is something we have to have. If we strike one in the near future, small firms will fare inconsistently, depending on their area of specialty. The losers will probably be those undertaking transactional work — which will reduce along with M&A activity; but there can be winners as well. Insolvency lawyers will appreciate an uptick in work after some quiet times during the COVID period,” he said.

“On the positive side, a downturn in work might restore some balance to the labour market after a period during which businesses across the board have struggled to find enough suitably qualified and experienced team members, and to manage budgeted labour costs.”

Being able to easily overcome these challenges means exercising increased discipline during the “good times”, Hazelbrook Legal chief executive Annabel Griffin told Lawyers Weekly.

“If the last three years have taught us anything, it’s that businesses need to be positioned and prepared at all times for the unexpected, the so-called ‘black swan’ events, as well as the somewhat more predictable cyclical events such as downturns,” she said.

“Firms should be building in buffers where they can, and giving themselves enough flexibility to weather events such as a recession. That means preparation is key during the good times. By positioning your business to be more strategic, you can be less reactive and able to act in a counter-cyclical manner during any downturn. This is done through building up a war chest, exploring opportunities for diversification and to build resilience into the business, and delivering for each and every client.”

After the pandemic forced many businesses to completely rethink their practices — FAL Lawyers learnt that planning ahead was key to remaining successful during turbulent times.

“During the economic distress that resulted from the COVID-19 pandemic, we worked to establish an insolvency practice and recruited expert insolvency lawyer Chloe Moorfoot as a partner to lead it,” Mr Francis said.

“Eighteen months on, the practice is thriving, and our firm is well-placed to meet the ever-growing demand for insolvency and restructuring services.” 

Additionally, as large firms look to downsize to stay cost-efficient, Boutique firms can leverage the fact that they are already a cost-effective alternative — meaning they are better placed to adjust to a recession than larger firms, added Mr Francis.

“Because of their lower overheads, boutique firms offer a more cost-effective service. And while clients of BigLaw firms may think the lower costs of boutique firms mean a lower quality of service, that isn’t the case,” he explained.  

“Our lawyers have large-firm experience, and the skills required of our team are identical, if not higher, to that of a BigLaw firm.” 

Boutiques are also able to offer a more personalised service to clients — and are thus able to build closer relationships to weather an “economic storm”, Ms Griffin added.

“A mantra that we live and breathe, and one that is applicable across industries, is ‘love the one you’re with’ — this means focusing your energy on existing client relationships and not being distracted from your purpose. Doing a great job for those who already trust you with their work is critical in normal conditions, but [it] becomes even more important when the economic storm clouds are gathering. As a wise person once said, ‘I never earnt a dollar from a client I didn’t have’. Where businesses are under cost pressures, it’s critical more than ever to be able to demonstrate value to your clients,” she noted.

“Another area small businesses should be monitoring closely is debtors — these are a leading indicator, and we often see businesses using extended or delayed payment terms as a way of managing their own cash crunch. It comes down to relationships and active management — including having reliable processes in place to catch late debtors early or, where possible, getting funds in advance to remove that risk. You also need to be willing to have hard conversations. Further, if you have strong relationships, and people value what you offer, any difficult discussions become easier because you can draw on mutual goodwill.”

As well as client relationships, smaller firms should focus on a number of things amid a looming recession — including consolidating as much as they can, adapting their branding as needed and assessing outgoings and what can be easily cut without affecting the firm’s productivity, client acquisition or staff retention — all things Amanda Little & Associates has started doing.

“We are relying on technology. We are engaging with technology providers to streamline our processes, automate where possible so as to limit the time spent on administrative tasks and maximise billables within their firms. Investing in technology not only increases firm productivity and profitability but also customer satisfaction as clients do not want to pay for administrative tasks to be done,” Ms Little explained.

“We are [also] valuing our staff. Firms need to consider if their team is productive and delivering at the level they need so the firm’s goals can be achieved. What feedback tools do you have in place to measure how happy your staff are? Do your best to keep the good people you have on your team as this will increase firm productivity and profitability.

“Small business and law firm owners are industrious entrepreneurs that will move and adapt to the changing environment. The key for them is to act now to minimise the impact on the firm or small business from the outset.”

Above all, however, smaller firms need to continue to focus on their culture during tough times, emphasised Mr Schultz.

“SME firms need to position themselves for agility; whether that means refocusing their offering, recalibrating their approach to scale, or preparing themselves to be able to quickly reposition the expense line,” he said.

“But above all, law firms need to remember that we are a people business. And that how we treat our teams in the bad times will define our culture in the better periods. We need to hasten slowly when it comes to decisions that impact on the loyal and long-suffering staff who have been the organisational backbone through the busy times. Your team will remember if you cut human resources unnecessarily at the whiff of an economic contraction.”