Market News

When Demand Falters, Which Law Firms Will Struggle?

By Andrew Maloney for The American Lawyer

Law firms are getting “the best of all worlds” right now, with increases in demand, rates and productivity likely leading to big profits again in 2021.

But it stands to reason that the favorable financial tailwinds will eventually blow another direction. What firms will have trouble weathering the storm?

Big Law leaders and analysts say those that focus on specific industries hard-hit by COVID-19, like retail and hospitality, and are undersized relative to peers or getting poached due to the talent war, could be left holding the bag when expenses creep back up or the demand environment shifts.

Those firms that don’t get office returns and flexible work arrangements right—that expect their lawyers and staffs to do the exact same things they did before the pandemic—could also suffer.

“To think we can drive people as hard as we did before, and that it’s all going to be peachy-keen, is just not true,” said Jim Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession.

Of course law firm employees are already burnt out. But firms that are sensitive to that reality, whatever their return-to-work policies end up being, are going to be better-equipped if and when there’s more financial pressure.

“I’m a real believer that coming back into the office is going to be almost as traumatic as leaving it 18 months ago. Because in the intervening months, people have gone through a hell of a lot of trauma and anxiety,” Jones said. “You’ve got a different group of people coming back, and the firms that are going to be the most successful will understand that and manage their people well. I think it’s going to mean attention to wellness and stress management, all of that. It sounds squishy, but I really do truly think it’s an important issue.”

Other problems might be masked right now by low expenses, some said. When things like travel and business development spend increase a little more, firms that are already seeing flat or decreased demand may look to consolidate.

Those firms may generally be smaller, with roughly 150 to 300 lawyers, some leaders said. They may also be more regionally focused firms, while national firms with more of a diverse practice mix usually will fare better even when macroeconomics begin to falter.

“I could imagine if you were very, very industry-focused, on industries that weren’t doing well, as opposed to firms that are more broadly hedged are going to be clearly doing better, or firms in industries that are thriving, are going to do better,” said Paul Schmidt, chair of Baker & Hostetler. “Clearly mergers and acquisitions and private equity have picked up tremendously, but I think if you were in a sector that was hit hard, and not well-hedged, that could have an impact.”

Such sectors include retail and hospitality, noted Kent Zimmermann, a consultant for Zeughauser Group. Firms focused on oil and natural gas have had up-and-down years recently, and those firms that were focused on litigation without a strong corporate practice also took hits when courts were closed last year.

Some real estate boutiques have seen mixed results during the pandemic, said Kristin Stark, a principal at Fairfax Associates. And those could continue to struggle even if the pandemic is in the rearview.

Another common thread for struggling firms relates to personnel and profitability. Those firms that are undersized relative to their competitors could also struggle when the demand environment shifts. “So they’re outgunned when it comes to attracting the best people and clients,” Zimmermann said.

The highly competitive talent market creates pressure as well.

“I do think you’ve seen a lot of lateral poaching that’s taking place. The increase in demand is fueling this war for talent we’re in, and it’s at all levels—midlevel associates to partners. There’s tremendous competitive pressure,” Stark said.

“You’ll see some [firms] with more departures than additions, and even though it might not be a financial drag, a direct financial drag, in terms of revenue per lawyer or profits per equity partner, it could clearly have a psychological impact. So, when you say which firms are struggling, I think that is something to look for—departures and competitive poaching for talent. I think that could be a real challenge for firms this year.”