Past experience, such as the financial crisis in 2008/09, has shown that the German legal market is robust. Today, in the midst of the Covid-19 pandemic, independent law firms are therefore largely confident that the market will remain stable and reasonably active.
This is not to say that the pandemic has not had an impact. Indeed, it is viewed by some as marking the end of the economic boom of the past decade. While the German government is keeping companies liquid by injecting cheap money into the economy, future consequences are still difficult to assess. Germany’s GDP fell by 5% in 2020, a shade less than analysts’ predictions and during the worst contraction of -5.7% in 2009. The economy has also fared relatively well compared with some other European nations.
Some expect that a more severe economic downturn will not take place until a later date if at all and, evidently, the pandemic has a varied impact across the different sectors of the German economy. In other words, the market is divided between those sectors that are struggling and others that have managed to thrive in this new environment. Although a dramatic wave of restructurings has not yet materialised, most predict a restructuring of certain segments of the economy.
Overall, German firms report that the demand for legal services remains high. On the transactional side, after a brief dip in the spring, M&A recovered over the summer, and equity capital markets work was more active than initially anticipated. Needless to say, demand for restructuring advice and litigation was high, and most firms saw an overall increase in the demand for commercial services such as employment law, data protection, and state aid and subsidies expertise. Regulatory and compliance matters – the Wirecard scandal being perhaps the most recent important example – also remain central to the German legal market and continue because of – rather than despite of – the pandemic.
The top independent German firms continue to carve out a significant segment of the market and great reductions in turnover and staff numbers have been the exception rather than the rule among the larger commercial firms. ‘The model of independent firms proved very resilient in the pandemic and we are confident to be able to continue on that trajectory,’ says Alexander Ritvay, managing director at Noerr.
Elisabeth Lepique and Markus Sengpiel, managing partners at Luther, agree that ‘the legal market is currently well prepared’, and the co-managing partners at Hengeler Mueller, Georg Frowein and Rainer Krause, are also ‘optimistic as regards the immediate future and the years to come’. Their explanation for the resilience of independent top-tier firms: ‘Crisis situations typically trigger a flight to quality.’
‘The model of independent firms proved very resilient in the pandemic and we are confident to be able to continue on that trajectory.’ Alexander Ritvay, Noerr
Nevertheless, firms do have to stay on their toes. Firms ‘need to keep an eye on any changes that their clients may be experiencing and be able to react quickly’, say Lepique and Sengpiel. They consider ‘full-service law firms with solid financial backing more crisis-proof because they can respond to erratic situations promptly and flexibly’. An essential quality for a law firm to deal with all changes and challenges the future may present is the ability to react swiftly and flexibly, according to Michael Arnold and Alexander Schwarz, co-managing partners at Gleiss Lutz.
Compared to multi-country firms, Arnold and Schwarz deem the size and footprint of independent firms an advantage in a crisis because ‘coordinating different cultures, countries, mindsets, economies and crisis levels all at once… can become challenging and time-consuming’. Independent firms tend to be ‘able to move much more swiftly, with fewer decision makers, a more unified culture, and fewer moving parts to consider’.
As large companies are reportedly reducing the number of firms on their panels in the current circumstances, firms with broader portfolios may stand a better chance of retaining their spots. Arnold and Schwarz attribute their successful year in the midst of the pandemic in part to Gleiss Lutz’s model: ‘As a full-service firm, we benefited from our broad expertise covering all areas of the law and as a full-lockstep firm leading to true partnership and solidarity, this helped and still helps in times of crisis.’
With some firms reporting an increase in invitations to pitch outside of Germany, an international orientation may be another key factor in remaining crisis-proof. This is not to say more specialised domestic boutique firms are in trouble; the trend towards specialisation continues in the German legal market and boutique entities are also still in demand, yet it may require financial flexibility and the ability to operate internationally.
Another existing theme that has kept the market busy and has been spurred further by the pandemic is the trend towards digital innovation. This can be seen across all sectors in Germany, notably the automotive, financial and healthcare industries. 2021 will be shaped by ‘a surge in innovation’, believes Ritvay, as ‘many companies are driving forward the digitalisation of their processes… with the goal of simplifying and streamlining corporate structures’. This also opens up the opportunities for takeovers, including carveout scenarios – there is an expectation that there will be more activity in this area and private equity will also play a major role.
With the digitalisation of business models, clients are also increasingly asking for legal tech services, such as the use of collaboration platforms, contract management and document automation solutions or the use of case management systems. Hand in hand with increased digitalisation, fewer face-to-face meetings and journeys and the switch to a constant online presence, firms have had to ‘manage the balancing act between increased cost pressure and the expectations of being permanently available’, Lepique and Sengpiel point out.
Finally, a major factor likely to affect large international firms more than independent domestic firms, regardless of the pandemic, is Brexit. The former may face a more challenging time for their business than domestic German firms that work together with a network of independent firms. LB