Inflation has been the scourge of law firms for decades. But new processes and emerging technology are enabling forward-thinking firms to combat inflation and keep their staff.
Economic inflation has taken the spotlight in financial news lately, and for good reason – in October 2021, Statistics Canada pegged the 12-month inflation rate at 4.7%, which is the largest year-over-year increase since 2003. But inflation isn’t just a consumer issue – it’s also affecting businesses in every industry, law included.
Perhaps you’ve noticed that your firm has started paying more for courier services, or Internet, or even office space. Or maybe you’ve had to give out cost-of-living raises so your lawyers, paralegals, and support staff can keep up with rising grocery and gasoline prices. If inflation is eating into your bottom line, you might be considering some staff layoffs as a means of easing budgetary pressure. But before you start sending out pink slips, you might want to consider some alternative means of keeping inflation in check.
If there’s a way for your firm to solve the problem of inflation without layoffs, it’s in your firm’s best interests to do so. The Canadian labour market has largely recovered from its pandemic losses, and in October 2021, labour market participation rates reached their highest level since 1976. Above The Law reported in October 2021 that the legal industry job market is hotter than ever, with ample new opportunities for recently laid-off employees.
That means if you lay off staff in the current labour market, you shouldn’t expect those staff to be available to come back when inflation eases; you should instead assume that anyone you lay off will have found a new job (possibly with one of your competitors) relatively quickly. If you do decide to move forward with layoffs, you should treat them as permanent dismissals – given the current state of the labour market, you should assume that you’ll never be able to re-hire the people you lay off.
Of course, if your firm can solve the problems presented by inflation without resorting to layoffs, that means you’ll be able to maintain healthy profit margins, keep your firm running seamlessly without any interruptions, and hold onto your key staff so competitors don’t poach your talent. Here are some of the ways that your firm can counter inflationary pressures, no layoffs needed.
Even if you’re considering layoffs, there are some personnel who are simply vital to your business – people you’ve invested a significant amount of time and money into training, whose skills have produced ROI for years. The people your firm cannot function without. These might be senior lawyers, or it could be the office manager who has a comprehensive understanding of the administrative and logistical side of the firm, or maybe it’s the one tech-savvy paralegal on the team who always knows how to troubleshoot software problems.
Whoever these employees are, you’ll want to ensure that you treat them as essential. Employee turnover is expensive – Manulife Financial estimates the total cost of turnover at 40% of the employee’s salary. That means if your $50,000/year office manager decides to accept an offer at another firm, you should expect to spend at least $20,000 or more hiring and training a replacement at a $50,000/year salary – assuming you can find someone to take the job at that compensation level.
($20,000 may even be a low estimate. Manulife’s estimate is from 2015; inflation that year peaked at 1.6%. The current inflation rate is 4.7%.)
Canada’s tight job market means job-seekers are in a position to dictate conditions, so the easiest way to avoid a hiring crunch is to boost your retention. This could mean giving your staff larger-than-expected bonuses, accelerating raises, or offering non-monetary perks or benefits like a subsidized gym membership, tickets to a professional sports game, or extra vacation days.
Yes, these retention measures will slightly increase your payroll costs, but the price of employee retention is minuscule in comparison to the cost of hiring and training new staff. If an 8% pay increase will enable you to keep a critical staff member who was thinking about leaving, then your firm has still saved a considerable amount of money.
(An 8% pay increase may seem quite high, but with inflation at 4.7%, over half of that would simply be keeping pace with the cost of labour, making it a 3.3% raise plus a 4.7% cost-of-living adjustment. And if that pay increase is the difference between keeping an experienced and talented employee or spending several months and tens of thousands of dollars hiring a replacement, it’s a worthwhile investment.)
Employee retention is an investment, but you can offset your up-front retention expenses and mitigate inflation by finding new revenues, increasing productivity, or reducing costs elsewhere.
When most law firms start to feel the pain of inflation, the first solution they look at is cutting expenses. While it may make sense to trim the fat if your organization is bloated, reducing expenses shouldn’t be your first reaction to higher inflation rates. Rather, look for opportunities for your firm to increase your revenue by working smarter instead of harder.
A straightforward across-the-board price increase would be the simplest and easiest way to increase your revenue; however, you may receive pushback from clients. Raising your fees could also open the door for you to be undercut by a leaner competitor. Before you consider a rate hike, look for ways to optimize your processes or increase your perceived value to clients.
Business Process Optimization can help your firm identify roadblocks and inefficiencies in your internal processes that could be costing you time and money. Adopting a Lean or Agile methodology can give you more insight into how your organization’s processes work, so you can find where your team is getting bogged down and implement process changes to resolve bottlenecks.
For example, if your firm tends to spend a significant amount of time waiting for client input, redesigning your business processes to gain more information during client onboarding or matter initiation could eliminate bottlenecks later in the process. Or, if your lawyers and paralegals typically communicate by email, they likely spend a significant amount of time providing or waiting for status updates. Using a project management system like Asana can enable real-time project tracking, so your entire team can instantly see the status of every matter and every pending task. This and other systems can help you cut down on inter-team communications, so your firm can spend less time providing status updates and more time accomplishing billable work.
One of the advantages of becoming a virtual-first law firm is lower overheads. Many law firms saw an immediate impact on their non-payroll costs when the COVID-19 pandemic forced them to adapt remote working arrangements. At English, Lucas, Priest & Owsley LLP in Bowling Green, Kentucky, for instance, the switch to remote working resulted in overnight savings on travel expenses, office supplies, event-related expenses, and printing costs.
Prior to the pandemic, the firm had been planning to move into a larger office space – their main office had become overcrowded, and the satellite office they had been leasing for six years was also getting cramped. The firm had assembled an exploratory committee to evaluate possible solutions, including buying or leasing a third office, or even building a new office themselves. When COVID-19 struck, the firm was forced to switch to a virtual office with their team working remotely – and after experiencing remote working firsthand, the firm decided to switch to a permanent hybrid office arrangement to control costs. A small group of employees work in-office on alternating days, while the rest of the team works remotely.
When input costs increase, one of the best ways to adapt is to boost your firm’s output. If your firm can close matters faster or expand your pipeline for new work without adding to payroll, you’ll be able to absorb inflation costs without skipping a beat – especially if your firm is charging flat fees.
Achieving a higher output without adding to your input costs means finding ways for your team to save time and work more efficiently. It means looking for opportunities to leverage economies of scale. Perhaps there are services your firm offers that you can productize – services that you can turn into do-it-yourself kits, self-serve tools, or other info-products that you can sell as digital downloads. While creating these info-products does take an up-front time investment, the right info-product can take tasks off your attorneys’ plates and enable your team to focus on matters that produce a higher ROI.
Another great way to boost your firm’s productivity and save time is by incorporating artificial intelligence technology into your processes. A cloud-based AI-enabled record management system like Appara can accelerate your team’s communications, automatically draft legal documents, and enable faster tracking of complex legal transactions through deal visualization. AI-driven tools are designed to accomplish tasks in much less time than a human would take, which can help your firm achieve a higher output on simple matters like wills, incorporations, and annual maintenance. There are several time-consuming tasks that your firm can offload to an AI for considerable time and cost savings, which can free up your team to pursue revenue-generating activities.
High inflation can cut into your firm’s profit margin, complicate plans for growth, and put pressure on your team. While the easy answer to inflation is staff layoffs, a competitive labour market and high rehiring fees mean you should assume that any employee you let go of will be gone for good. Your firm can reduce inflationary pressures by mitigating staff turnover, embracing remote working, using AI to boost productivity, and finding opportunities to increase revenue. Instead of letting inflation dictate how you run your firm, look for opportunities for creative solutions and emerging technologies that can increase your output or save time – in doing so, you might find that you do have room in your budget to keep your team.
Discover how new and emerging technologies can help your firm boost profits, save time, and streamline your processes. Join our newsletter for more insights and practical advice to help your firm create ROI with digital tools.
Engaging insights and the latest news, designed for legal professionals.