Casting my mind back to the ancient history of mid-March when I penned my first piece assessing the impact that the coronavirus crisis would have on the profession, I was forced to rely on guess work and recent history as a guide. London was in semi-lockdown, the official death toll from the virus hovered around 10,000 globally – taking a view on how it would play out was a matter of gut, contacts and an anorak’s grounding in the business model of law.
My core case was that the profession would be one of the least-impacted major industries but would take a major hit in what was clearly going to be a deep recession. The other contention was that the pandemic would put the lofty values and soft issues that law firms have become increasingly inclined to promote to a brutal test, a benchmark many would fail.
Judging now in early May as I write this, with the world facing the worst economic downturn since the 1930s and more than 250,000 deaths, how has the profession responded to the initial onslaught?
It could have been worse. A lot worse. At top-50 UK law firms, the primary response has been to slash partner distributions to keep cash in the business; given the timing of year-end, that can hoard a lot of cash. Other common measures have been deferring pay reviews and bonus awards while some firms have cut pay in the 10-20% range, usually with protections for lower-paid staff. Others have experimented with reduced hours – sometimes married to lower pay. Sliding reductions in hours is a surgical response for managing partners, compared to the dull blade of staff-wide pay cuts as economic shocks typically supercharge utilisation in some teams while virtually shutting activity in other departments. Behind the scenes, many firms have drawn down revolving credit facilities, in tactics that can aggravate law firm bankers, but then law firm bankers have often proven fair weather friends.
Partners are being heavily lent on to get invoices paid, the other reason for cancelled distributions. That’s not an inconsiderable burden given that clients currently want far more senior lawyer time but that’s why partners get the big bucks. Discretionary spend is obviously toast, leading to blanket hiring freezes and cancelled partner conferences.
While the legal industry’s technology chops are often derided, by consensus major firms have more than stood the test, moving more smoothly to remote working than many predicted. One law firm leader at a top-ten UK firm voices increasingly common sentiments: ‘This is a sea change in the industry. Office working will never be the same again.’ That has obvious long-term implications for the business model of law, though the current avalanche of commentary on the topic is largely ill-disguised marketing.
In terms of the initial response at major commercial law firms, what have been commendably absent so far are knee-jerk cuts or crass, short-term measures. A substantial number of mid-tier firms have made generally fairly limited use of the furlough scheme in a move that remains open to debate. The furloughing initiative was not designed for highly-profitable law firms, the City’s top firms have been wise to steer clear of it for care of their brands.
Such poise under pressure did not just happen, it has been a collective choice at the top of major law firms. Kicking around the issues with hard-nosed contacts, it is clear that there has been a widespread decision that partners should take the first and greatest hit. ‘You have to put partners at the front of the pain queue,’ notes one Magic Circle leader, echoing common sentiments, adding: ‘Partners will take the first hit as owners of the business before they have to make difficult decisions.’
Many law firm heads are still citing the banking crisis and the lasting negative impact on firms that made harsh cuts as reasons for a more measured stance this time. And the huge improvements in financial management in response to the post-Lehman wipeout have provided balance sheets strong enough to underwrite such long-term considerations. Legal Business has been a persistent critic of the decline of strategic leadership in major UK law firms in recent years, with good reason, but the dramatic strides in the operational running of such firms have more than proven their worth.
Will such restraint in imposing pain on junior staff endure? That test is yet to come. For context, the profession did not begin the wave of heavy cuts that were unleashed in early 2009 until four months after the most intense period of the banking crisis in the autumn of 2008. These remain very early days.
So far large law firms, the kind that rely on major plcs, sponsors and banks for their daily bread, have seen a very modest impact from the crisis compared to most industries. There has been a rush of triage work and intense demand in employment and restructuring and some areas of compliance, commercial, banking and disputes to offset the deep slump in mainstream transactional work. Some major firms are running only 5-10% down from their collections for the same period last year.
But emergency response work will quickly pass, leaving a pronounced slump, even as the lockdown starts to ease in late May and early June as currently seems likely. Moreover, the cash position gets dramatically worse the further down the food chain you go. As such, this crisis will greatly strengthen the position of large law firms after a decade in which they have generally struggled for momentum. Perhaps, this crisis will also leave law firms with a clearer dividend for treating their staff decently than we have seen through previous downturns.
We will get a far clearer picture of the industry’s willingness to protect staff and take the long-term view by early autumn when we have a concrete idea of what working in the New New Normal means. The autumn is also the time when the industry will have to seriously consider the case for the kind of associate comp reset that Freshfields pushed through in 2009, though this will be far easier to sell if partners have demonstrably taken the initial brunt.
None of which changes the fact there has been much to celebrate in the legal industry in the thoughtfulness of its initial response to this crisis. To be blunt, I’d expected far more cant to have been exposed by now, far more of the lofty pretensions to have been abandoned at the first sign of trouble. That, for now, is something to be acknowledged and saluted in a brutally-uncertain world.