The back-to-school feel in the City is unmistakable, not least because the actual schools are back, as major law firms attempt to find something like normality in an environment that remains a few standard deviations from the norm.
In some ways it was ever thus come the end of August. As one law firm leader remarks: ‘I said to our FD: “September will be crucial,” and was swiftly was reminded I’ve said that for the last five years.’ This has always been the defining period for law firms’ financial year, just more so now. So, how’s it looking out there?
As we recently noted while sizing up the early 2019/20 financial results , large commercial law firms have held up remarkably well in the face of a severe downturn, far better than their initial modelling predicted.
But inevitably April year-ends and the long lead times law firms work to meant that 2019/20 results are a hazy indicator of the profession’s Covid-19 resilience. However, now, six months since the coronavirus pandemic gripped Western economies, the legal profession has a lot more data to gauge the impact of a shock to the global economy that will be reverberating for years. Sounding out a dozen law firm leaders and senior figures in the industry during September, it is clear that the mood of bemused, almost embarrassed bullishness has only strengthened through the year as the robust performance has continued.
Citing double-digit percentage revenue growth through 2020, one City head of an elite US firm saw an ‘unbelievable August’. Elsewhere, one senior partner of top City firm, usually a pessimist, reflects: ‘It’s been surprisingly good, way better than we modelled for. Even M&A has started to come back in a surprising way.’
The cocktail of work powering firms is familiar, with finance and capital markets teams making up for the initial slump in mainstream M&A; employment motoring on; and litigation holding steady. Restructuring is spitting out work unevenly, though this is expected to boom as unprecedented levels of state support taper off through the autumn. Real estate remains subdued but crucially M&A has held up far better than expected with strategic deals still getting away – pivoting sponsors finding ways to keep their counsel busy and the pipeline of new money work lengthening by the day.
While trading is generally softer than a normal year, there’s not a huge amount in it. Says one senior partner at a Magic Circle firm: ‘The feeling is that the new normal is a bit down but not too down.’
‘It’s been amazing,’ concludes one of the better-connected strategic consultants. ‘The top firms can hardly believe how resilient their performance has been. There is a subdued official tone given all that is going on [in the wider economy] but managing partners are quietly optimistic.’
For nuance, this confounding picture of health is not spread that predictably. Despite the tendency of pundits (and I hold my hand up) to arrange such developments into neat narratives, the sectoral deities rarely behave. For all the talk of flight to quality, it’s not that clear from my conversations and the early data that this is a straight story of elites profiting at the expense of mid-tier rivals. There are also a number of firms with comparable models experiencing surprisingly different results.
While this period still looks like a decent opportunity for the Magic Circle to reposition after the mixed fortunes of the 2010s, there is still no shortage of challengers nipping at their heels. Some of the better UK mid-tier players remain in robust form and many top US firms are performing amazingly well in London. ‘The leading US firms are kind of embarrassed at how well they are doing,’ notes one veteran headhunter. It appears the stripped-down practices of major US firms are excelling in a market defined by refinancing, active sponsors, special situations and securities work.
As one private equity veteran notes, the relative stability of equity and credit markets this year, a stark contrast to the banking crisis, has allowed transactions to get away despite turmoil in the underlying economy. ‘It’s the volatility that kills you, but this has been stable enough to price assets.’
But even allowing for some varying fortunes, the broad conclusion is clear: the legal industry is doing far better than expected, a trend reflected by firms restarting profit distributions and ending hiring freezes and temporary part-time staffing measures.
Other factors have played in favour of major law firms. Some had already been planning for a downturn before Covid-19. Add in talent shortages in hot markets, and many firms went into the crisis lean. Furthermore, freeing up of partners from commuting and business travel led to material increases in productivity and, remarkably, some improvements in cash collections during the worst UK economic downturn on record.
A scale of one to 2020
If the short term is currently looking suspiciously bullish, many in the industry are trying to parse the longer-term impact of the pandemic and here the outlook gets hazy.
Having proved that they can effectively operate for extended periods remotely, major City law firms are gingerly prodding staff back into their prime London offices. During the second week of September, many firms were reporting 10%-20% of staff back in their City offices amid expectations that this would progressively ramp up through October. There are obvious medium-term limits on that with social distancing measures limiting capacity and major firms are increasingly settling on the notion that staff can work remotely for 30%-40% even when normality returns, a big shift for the industry.
But the long-term impact of prolonged remote working on law firms remains a matter for debate amid unease that the glue holding these firms together will weaken over time; as one Magic Circle veteran concedes, there is ‘zero client demand’ for lawyers to get back into their offices, the fear is that the fabric of firms will fray without some return to office life. Already recruiters have shifted to making senior placements remotely – a process that moves far more quickly than luring people out of offices for meetings – while there are growing fears about the impact on training and development of junior staff. ‘The longer-term question is if remote working erodes the bonds of loyalty,’ observes one consultant. ‘It’s not happened yet but can that sustain in a semi-normal market?’
The length of corporate leases obviously curbs firms’ ability to drastically cut or rethink office space in the short term. But while this radical shift to different ways of working has exposed many of the weaknesses of traditional office life, it has done little to resolve new problems inherent in the era of constant Zoom demand. We remain a long way from a new settlement for the post-Covid-19 workplace.
There has also been much focus on the impact of the crisis on innovation and technology in the legal sphere, and here things look predictably incremental. The crisis has certainly strengthened the hand of legal technologists, with one senior partner expressing common sentiments: ‘The IT team members have been heroes.’ But accelerating the adoption of processes already being put in place has not extended to driving broader business model changes.
Notes one head of a top 30-UK firm: ‘The pandemic has been more about the pace of change rather than leading to new change, which is a positive thing. We thought of Brexit as an event and it turned out that it was a process. Covid-19 is the same.’
On the subject of Brexit, many firms are grudgingly planning for a hard exit and feel they can handle it. Quips one senior partner: ‘Brexit doesn’t feel good but all this has put it in perspective.’
If this outlook of stability looks remarkably peachy for partners, there is more cause for angst further down the pecking order. Leading firms are generally intent on avoiding banking crisis-style cuts but a looming issue is tanking associate attrition, which is ‘down to zero’ in the words of one senior partner. Given that law firms recruit fee earners three years in advance, this will cause major serious issues if the labour market doesn’t soon loosen up for junior lawyers, likely leading to a run of tougher performance management exits. It is also the junior lawyers and business services staff that have suffered the brunt of the uncertainty and the negative impact on their development through the crisis. Some of the more thoughtful law firm leaders are already fretting about the mental health impact on teams, amid fears that rising infection rates could lead to another lockdown.
None of which alters the growing realisation that the profession has emerged relatively unscathed by the hurricane that has hit so much else of the UK and global economy. As one law firm leader sums up, ‘We keep pinching ourselves.’
