Growth in a Downturn - Revenue or Cost Driven?

It's results time again, when the legal press focus in minute detail on short-term results - thereby increasing lawyers' focus on results in the last 3 months, 6 months or 12 months, all of which are too short term.

The news this time round is continuing revenue falls in some of the big players, headed up by Simmons who posted a 16% fall in revenues (see the full story here). A&O also show a fall - Norton Rose and Lovells are expecting flat results. All of these firms have been cost cutting, and it will be interesting to read the results of the mid tier firms where cost cutting has been the most savage. The evidence would seem to suggest that cost cutting hasn't helped enough - or perhaps they will suggest that it was going to be much worse. By focussing on cost cutting, some firms will have dropped the ball with regard to business development, which, I suggest, is the real way out of the downturn.

It's not been all bad news. Dentons posted a 3.5% rise in revenue in the same period (see here) - for which they thanked not savage cost cutting, but rises in international revenues.

The message has always been - the best way out of a downturn is a focus on revenues not on const-cutting. This article gives an interesting take, and sums up by saying "...do not sacrifice the future [by one-shot cost reducing savagery]" and encouraging firms to concentrate on cash efficiency and revenue growth. In another part of the same article, the author tells firms not to retreat - no matter the temptation, do not hide from the storm, but instead aim to work hard to grow your revenues. The author quotes a Harvard Business Review article which states:

Of the firms that made major gains in revenue or profitability during the last recession, more than 70% sustained those gains through the next boom cycle. The corollary was also true: fewer than 30% of those that lost ground were able to regain their positions.

Growth in a downturn is driven by revenue, not by cost cutting. I am not suggesting that any firm should ignore costs. Have a sensible policy to manage costs sensibly - but have the lawyers doing what they do best which is to provide high quality business advice, manage their clients, find new clients and find new work. Costs are important, and client & matter partners must have a very good understanding of their costs in order to be sure that their work is profitable - but their responsibility is to drive forward the revenue side of profit, while letting the managers of the business manage the cost side of profit.

Manage the costs, but work for the revenue - it's the only way forward.