Sounds impossible right?
A quick look around suggests that we shouldn’t be so quick to dismiss it.
Just last week a similarly improbable thing happened – the price of a barrel of oil fell to negative $37.36.
Let that sink in. Producers of oil were paying people to take their product.(1)
You might be sitting there saying that oil is nothing like a highly skilled professional service, and you’d of course be right.
However, oil and legal businesses share one very important characteristic, they’re fixed cost industries.
A fixed cost industry is one where the cost base for producing your product is hard to change (fixed) and can’t be easily or quickly scaled depending on demand.
In the case of oil production, once a well is drilled and oil is flowing it’s quite difficult and expensive to shut it down and restart it. A well is going to produce roughly the same amount of oil from one month to the next regardless of how much storage space there is or what the oil price might be.
In the case of a law firm it’s hard to get out of office leases, IT systems and sponsorships.
Most critically though, it’s hard to downsize the partners and staff that you’ve spent years hiring and training and who are loved by their clients. You can’t expect to fire them to save costs and then hire them back in 6 months when things pick up.
In the reverse, it’s the same reason that at 70% capacity utilization most firms break even. If they’re at 95% capacity then it’s time for the partners to start looking at houses in the south of France. Your costs don’t change in either case but your revenue and therefore your profits go up exponentially.
It also means that in both industries if you believe that there is going to be an upturn in any reasonable timeframe you want to find a way to continue to pay your fixed costs.
It will mean that when things get back to some semblance of normality(2) you’re going to be ready to go with roughly the same core team that made you successful in the first place.
In the short term though there is going to be a lot of excess capacity within firms.
We’ve heard from 2 different global firms in the last week that their capacity utilization is down to roughly 50%.
This of course doesn’t apply uniformly across firms. It’s likely that the employment and restructuring teams are a lot busier than they were previously and the M&A and financing teams a lot less so.
Unfortunately excess capacity is like potato salad at a picnic. It goes off if it isn’t taken up and you can’t get it back.
The question becomes how to best use it.
On the other hand we’ve also heard some variant of the following from at least three in-house clients in the last week – “We’re reeling, we’ve got no budget and have been told not to start on any new projects but our workload has increased massively.”
When pushed on this it emerges that what they really mean is that they’re busy in very specific areas (with furlough, trying to work through the various government schemes and working out what to do with a host of broken contracts) and have simply been neglecting everything else.
One client still hasn’t finished some GDPR work, another has some contracting issues that need sorting out.
This isn’t work that’s going out to a firm any time soon. However it is work that a firm could help with.
It’s a mismatch that both could take advantage of.
It’s not a call into a GC asking what a firm could help with. There’s too much.
It’s an ask from private practice. Give us a project or task that we can concretely do for you, free of charge in one of the following areas where we have excess capacity.
Clients should also expect that the firm will complete the work on their time frame and not take advantage.
It does two things, solves a problem for a client and uses some excess capacity that otherwise would have gone to waste at the firm.
In-house – you shouldn’t be afraid of making this call to your relationship firms either if there’s something they can do for you.
Both sides should then record the effort the firm has made so that in due course when paid work picks back up the firm can be rewarded.
It’s a firm investing in a client relationship for the future and understanding their client’s business in a better way.
At Alacrity we track value added services closely so that a client can quantify and understand which firms have invested in them. It’s the kind of transparency that is mutually beneficial to both.
I think the price of legal services just went negative.
Let’s not let this opportunity go off.
Never say never,
Christopher Thurn
Founder – Alacrity Law
1. We won’t delve into the debate here if this fall was driven by the technicalities of rolling oil futures, a genuine slump in oil demand or a lack or storage space. Let’s assume it was some combination of all three.
2. Bog standard caveat about normality being whatever the new normal turns out to be.
