Wednesday, March 25th, 2020
By Gideon Grunfeld
The present situation is bringing a few harsh realities to light. One is that the biggest threat to law firm survival is running out of cash. And the biggest expense that law firms and pretty much all professional service companies face is the cost of their people. It is therefore imperative that law firm leaders take a sober look at the direct and indirect costs of their workers.
There are businesses that should be reducing their workforce rapidly in the short run. These are companies that are suffering dramatic declines in the demand for their services and whose employees are not that highly skilled. For example, we recently spoke to the owner of a dog walking and pet sitting company. That company’s business model depends on people not being home in the middle of the day. Now that many are at home, approximately ninety percent of its clients have cancelled.
Dog walking will resume once people get back to physical workspaces outside of their homes. When that time comes, the supply of available dog walkers will probably be as high as it is now. Thus, letting people go now could make a lot of sense for dog walking businesses or for other service providers that are experiencing massive declines in demand and expecting a readily available supply of workers in the future (hotels, many restaurants, commercial parking companies, etc.).
A vast majority of law firms, however, are not in this situation. There are areas of law that are facing major reductions in demand for their services. Many areas of civil litigation have been put on hold. The number of divorce filings, for example, will probably decline sharply in the short term. But divorce is likely to spike once couples are no longer forced to live together in isolation. And when that happens, divorce firms will not want to train new hires who inevitably lack the skills and experience of those they’re replacing.
Most law firms are better off looking to alternatives like reducing hours for employees and independent contractors instead of laying them off or starting a furlough. We suggest that leadership review cash flow on a weekly basis, so if the financial and health impacts of COVID-19 last beyond eight or twelve weeks, the firm is ready to revisit its options. For now, it is generally a mistake for law firms to let people go.