10 Apr 2020  | 

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Above all, this crisis too will pass

Two months, it turns out, is a long time. For most law firms, 2020 looked as though it was going to be a banner year. Whispers could be heard that a recession was inevitable, though probably not for a while.

Markets felt robust. Besides a prescient few whose warnings fell on deaf ears, that the world was ill- equipped to deal with a global pandemic, who would have thought that a crisis of this magnitude would be triggered by a ‘flu-like virus? One cannot yet assess what the economic impact will be on countries and economies, far less on individual law firms and their clients. Sudden economic stops like these are unprecedented in the modern developed world.

Macro-economic policies have been thrown overboard in ways that, mere months ago, central bankers would have dismissed as naively outrageous. Clients are understandably alarmed about legal implications of these uncharted waters. Amidst a lockdown unprecedented in modern history, lawyers are extremely busy.

Prepare now for perhaps needing more liquidity later

Yes, lawyers are busy. But will they be paid? Many clients whose businesses are locked down will be cash-strapped when the time comes to settle their invoices. Debtor days will increase, also bad debts.

Law firms are fragile businesses with thin balance sheets. Early modelling would be prudent of the firm’s revenues, cost base, and options to safeguard profitability. For law firms applying to increase lines of credit, bankers will be asking more questions and seeking evidence of sound planning in the face of an uncertain future.

Bankers will probably also be swamped by others seeking relief and, like everyone else, will be working from home at least until late April. So, it would make sense to broach this matter as soon as that modelling shows that the firm might require such additional liquidity. On the positive side are government measures to protect businesses and interest rates hovering around zero – at least for now.

This is not the same as 2009, but a similar law firm merger wave might well follow

Everybody aged mid-thirties and older remembers the global financial crisis, especially the speed with which the markets froze and the aftermath.

In 2009/10, many law firms were carrying more staff than they needed. Deep headcount reductions in 2009 and 2010, painful though they were, brought a measure of immediate financial relief. For some firms, though, these measures were inadequate to restore competitive advantage.

The decade 2010-2019 saw seventy large law firm mergers in the United Kingdom and USA (‘large law firm mergers’ being defined in this case as where the merged firm had >500 lawyers and the smaller firm >100 lawyers.) By comparison, the decade 2000-2009 saw only thirteen such mergers.

Mergers generally have also been trending upwards in the UK and USA since 2010. Are we going to see a new law firm merger wave, later this year and into 2021 and beyond?

In a few months (perhaps even weeks, or already) it will dawn on many law firm partners that their incomes this year are going to be not slightly but significantly less than they expected, even mere weeks ago.

At that point, those who are in high demand in the market will make decisions about whether they trust their firms’ leaders to return their firms to profitable growth, or not. Many might conclude that they are on sinking ships. Without them, remaining partners might find that their business model is no longer viable. Cue merger discussions.

Given the digitalisation of legal services that is taking place concurrently, though, not all lawyers should automatically assume that they will find homes in the merged firm.
As always, a merger forms the opening gambit to a far more serious matter, namely ensuring the merged firm is stronger than the sum of the two legacy firms.

Mergers are wonderful opportunities to transform businesses in ways that would not be possible under the status quo. In a new merger wave, transformation will likely focus far more than before on digitalisation of processes, both client-facing and in support services.

Lawyers with old-fashioned skills will likely have more chance of finding themselves out in the cold than those who are digitally literate.

Bring your partners along with you

Honest and frank conversations are needed amongst partners about how their firm’s interests are to be secured, and the future. Of the medium-term scenarios that one might build today, some are quire dire.

While one should always remain optimistic, hoping for the best and being ready to seize opportunities that make sense, it is also prudent to build contingencies to address the possibility of more pessimistic outcomes.

Are adjustments to the partner compensation system warranted? How can partners support each other and other members of the firm and clients as some of them contract the Covid-19 virus and lose loved ones to it?

How can the risk of fees proving non-recoverable be mitigated? What if careful reflection reveals that what it will take for the firm to operate sustainably exceeds the appetite of a critical mass of partners that the firm cannot afford to lose?

Use the crisis to your advantage

One very clear opportunity that the COVID-19 pandemic has spawned is for firms to really get on top of remote, mobile working.

The legal workspace is not only a law firm’s offices, but everywhere that its lawyers and support staff work. Even the most techno-recalcitrant of partners is working from home now and those from firms that have invested properly in the right tools, probably being pleasantly surprised at how well it all works.

For firm’s planning new offices, this might provide the catalyst for previously discarded plans for agile working to be revisited. How can one make remote work as productive as in-office work?<

Above all, this crisis too will pass. Most firms will survive and many will emerge if not actually stronger than before, then with the capability to become so. Partners should be asking themselves now what steps they need to take for their firms to be among these.

This article was first published in The Global Legal Post on 9 April 2020.