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Comment: City law shows remarkable crisis immunity (but managing partners aren’t ready to spread that message)

Everybody likes to go along with the crowd, in business as much as life. So as the global economy is battered by the coronavirus fallout and many business sectors are on their knees, it’s inevitable that the legal industry has adopted a subdued tone focusing on the existential challenge it too faces. After all, official figures this week showed that the UK, home to probably still the world’s second largest legal market, saw its sharpest economic contraction since records began in the second quarter of 2020, falling 20.4%, one of the worst downturns in Europe.

The only issue with the profession’s stance is that the emerging facts are establishing this position as entirely unrepresentative of the outlook for major commercial law firms. Legal Business recently highlighted the robust showing in the face of Covid-19 judged from a dozen early results from top-50 UK law firms. The second-wave set of numbers from another group of firms in the same peer group doesn’t just support that picture of remarkable resilience, it materially strengthens it. These results are extraordinary!

These include numbers from bellwether outfits such as Eversheds Sutherland, Addleshaw Goddard, Osborne Clarke, DAC Beachcroft, Macfarlanes, Travers Smith, Stephenson Harwood, Withers, Watson Farley & Williams, Mishcon de Reya, Brodies and Stewarts. All but two of that camp achieved revenue growth, while eight also hiked profitability. Moreover, Macfarlanes, Eversheds, DAC, Withers, Brodies and Stewarts hiked their top lines by more than 5%.

Certainly, expectations that the later firms to announce results were nursing a bleaker financial position than peers have proved wide of the mark. Likewise, the range of practices performing robustly demonstrates how broadly this resilience has been achieved across the commercial legal sector.

There are a couple of less robust exceptions to that robust picture that are worth highlighting. Most notably, Travers Smith saw a decade of growth end as its revenues fell by 1% while net profits declined 11%. But given that Travers unusually posts its result to the end of June, rather than the traditional April, the firm’s 2019/20 numbers caught the full, brutal brunt of the Covid-19 lockdown on the UK economy. Given that context, these numbers are frankly a very good result. Stephenson Harwood’s results  – which saw growth stall – are a little harder to interpret, given the firm’s emphasis on contentious work. But, again, in the context of what is happening in many sectors, we’re a long, long distance from the disaster scenarios all law firm leaders were modelling back in March.

The robust wider results are certainly a reminder of a fundamental truth of the profession: the relationship between the size and performance of national economies and respective legal markets is surprisingly weak. Large economies can have tiny legal markets (Japan) and, conversely, smallish global markets can produce outsize legal sectors (the UK, Singapore and Hong Kong). The reason for this disparity is not always clear but longstanding respect for the rule of law, exportability of local law, favourable time zones and the presence of a major global finance hub are obvious factors. By the same token, the impact of the ebb and flow of national economies on law firms is hard to pin down. The general rule of thumb is that a booming economy or dislocating chaos are good for commercial law firms; the real enemy of growth is not downturn, it is sluggish stasis.

The experience of the banking crisis, which hit law firms harder than Covid-19 has yet, may look to undercut that claim but the context has hugely changed. Major City firms went into the previous crisis laden with corporate fat and poorly hedged having for 20 years moored their business models to investment banks. Step forward to 2020, when financial management has much improved and law firms have achieved a better balance between contentious and transactional work and the experience has been very different.

It goes without saying that having an outlook that most sectors would kill for right now does not mean the profession is not facing prospects that would be gloomy by normal yardsticks. There will be more downside playing out in 2020/21 numbers than last year, Brexit looms, fresh Covid-19 spikes are likely and law firms cannot entirely escape the inevitability that plc clients will be more cost conscious on business-as-usual work in future.

Nonetheless, the feedback from managing partners is that current trading is standing up far better than expected and many of the disaster-response measures put in place have not only coped with the situation, they have gone beyond what was needed.

Partners can expect to start getting more of those delayed distributions now, unwinding measures that were always more about incentivising cash collection (with huge success, by all accounts) than lack of capital. The Covid-19 crisis proved again that the full profit distribution model of law firms, though often derided as sloppy, is in reality a huge promoter of fiscal discipline. Its real weakness is its negative impact on long-term investment and encouraging excessive partner mobility, not under-cutting financial rigour.

A key test will be in September when law firms will see how activity returns for the autumn period but much of the current war footing is about central management pushing through long-wanted changes rather than strained balance sheets. And despite the shock, the UK economy is now believed to have been expanding for three months straight after the savage reset of April.

The caution, discipline and generally sensible measures seen at major law firms also attest to the muscle memory of the banking crisis and the reality that these are well-run operations. That said, it’s not apparent how much longer law firm leaders can keep wearing a fiscal hair shirt under the guise of a crisis that is impacting other people. The time is rapidly coming for the profession to count its many blessings, stop retrenching and start again investing for a dynamic, challenging period ahead for the law game.

alex.novarese@legalease.co.uk

Click here for more on the 2019/20 financial results as they come in


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About Alex Novarese

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