At the beginning of the Covid-19 pandemic, German law firms found themselves wary of what the future might hold and prepared for the worst. However, 18 months later, most say their fears were unwarranted and several have reported 2021 to be their financially strongest to date. The success of the leading German independents amid a global crisis raises the question of how they have adapted to a pandemic-driven environment, and whether hierarchies in the market have shifted at all as a consequence.
Germany’s economy is currently on the road to recovery. According to the government, the GDP is expected to grow by 2.6% in 2021 after it took a 5% dip the previous year. While private consumption is mostly responsible for this rebound, manufacturers are struggling in light of global supply shortages, with producers unable to adapt to increased demands after 2020 saw a halt in consumer spending. However, this has not yet stopped the upwards trajectory of economic growth.
Overall, the economy has proven adaptable, and its law firms with it. ‘The pandemic has shown the enormous resilience of the independent law firm model,’ says Alexander Ritvay, co-managing partner at Noerr. At Oppenhoff, senior partner Myriam Baars-Schilling has a similarly positive attitude, reporting that ‘the impact of the pandemic on our firm was definitely better than anticipated’.
‘The pandemic has shown the enormous resilience of the independent law firm model.’
Alexander Ritvay, Noerr
This optimism can, in part, be attributed to the fact that the big slump in commercial and corporate mandates never arrived. After a short period of uncertainty at the beginning of the pandemic, work recovered beyond the expectations of most firms. Now M&A, private equity, restructurings, and employment are identified as current key drivers of activity in the legal market.
Mark Wilhelm, founding partner of litigation boutique Wilhelm Rechtsanwälte, describes how ‘clients and the markets in general were paralysed for some weeks in which all companies needed to adjust their services to the new pandemic situation. However, we were surprised to see how fast business as usual took over again’.
Exceeding hopes of a quick recovery, Baars-Schilling speaks of ‘a huge appetite for M&A’ that has been keeping firms busy non-stop since summer 2020. This is expected to last. ‘With the low interest rates and the liquidity that’s in the market, we believe that transactional activity – both domestic and foreign – will continue and probably increase in the forthcoming 12 months’, says Ritvay.
Drivers of business
Law firms have felt the pressure to adapt amid uncertain times, and new solutions to single out the best market approach are frequently being rolled out. Oppenhoff reacted quickly in early 2020, establishing its own Corona task force – a multidisciplinary team equipped to face the numerous legal challenges of the pandemic. According to Baars-Schilling, the effort has paid off: ‘We strengthened relationships with existing clients and won a significant number of new clients.’
Luther has also entered uncharted waters by joining forces with French counterpart Fidal, forming the international organisation unyer that promises to have ‘a global reach, one exclusive member per country, and [providing] much more than legal services’. The announcement came in May 2021 and while it may be too early to judge the result, the move demonstrates one of the ways in which the German players are keen on expanding their reach on a global level.
Cost efficiency might also be an advantage for the leading independents. As we have seen in the past year, crises cause people to be more reserved in how they spend their money, and companies are no different. Clients are reportedly more cautious with the amount they are spending on legal services. Michael Arnold and Alexander Schwarz, co-managing partners at Gleiss Lutz, say they expect ‘clients will continue to be cost sensitive, depending on how they fared during the pandemic’. Locally-sensitive, competitive pricing is another example of how independent firms gain an edge over their multinational competitors.
The pandemic has sped up digitalisation processes all around the world, and Germany is no exception. As Baars-Schilling puts it: ‘Digitalisation projects are still at the top of the priority lists of many of our clients.’ Not only do clients push digitalisation within their own structures but they also demand firms to develop and use innovative solutions that are flexible and integrated. Legal tech applications are in high demand as ever, and firms are keen on developing case management platforms, automated systems, and the like. Luther’s co-managing partners Elisabeth Lepique and Markus Sengpiel attest to this development, saying: ‘Clients increasingly expect holistic and technology-based project management due to highly complex issues. This means an increase of flexible and tech-based working in exchange with our clients.
‘Digitalisation projects are still at the top of the priority lists of many of our clients.’
Myriam Baars-Schilling, Oppenhoff
At Gleiss Lutz, Arnold and Schwarz also speak of ‘an increased demand for efficient solutions, especially for simpler and more repetitive tasks that can be handled by legal tech tools’. It seems that more than ever, staying on top of the digital game is crucial for firms to keep their market share. With the processes of digitalisation gaining increasing momentum, Ritvay expands on this idea, stating: ‘It will be interesting to see how artificial intelligence will find its use in the top market segment in order to improve both quality and efficiency.’ In this context, firms with full-service approaches will benefit from being able to offer interdisciplinary advice.
Small and perfectly formed
With larger firms reporting strong financial gains in the last year, how have smaller boutiques fared since the beginning of the pandemic? ‘For domestic firms that lack high-end specialisation in certain fields, the market entry of major international firms in Germany with all their marketing power is a huge challenge,’ says Wilhelm.
‘Clients increasingly expect holistic and technology-based project management due to highly complex issues. This means an increase of flexible and tech-based working in exchange with our clients.’
Elisabeth Lepique and Markus Sengpiel, Luther
However, contrary to expectations, clients do not appear to exclusively rely on larger advisory teams in the face of crisis. At Oppenhoff, Baars-Schilling reports: ‘We still see a lot of carve-outs from large firms, and boutique firms are starting to benefit from clients’ desire to give their work in a more selective way to a larger number of firms.’
With cost efficiency being a driving factor, clients are more likely to turn to boutiques when a full-service approach is not a prerequisite. Thus, specialised firms remain in high demand and Wilhelm is confident in the strengths that smaller teams have to offer: ‘Boutiques will assert themselves on the market.’
It comes as no surprise that firms have noticed an increase in clients’ readiness to take matters to court instead of settling out of court. Fuelled further by the Wirecard and Cum-Ex scandals, disputes make up a significant part of work being conducted in the German legal market. The insurance sector was especially affected by this trend, as insolvencies and shutdowns caused a wave of disputes to find their way onto the desks of litigators. Firms specialising in insurance disputes have profited heavily from this development, as cases over business interruption insurance rocketed during the pandemic.
The high demand not only kept these firms busy in terms of workload, but also helped them expand their reach. ‘We had a lot of media attention on our work for restaurants, shops, and hotels that had to close during the first lockdown. We were able to promote ourselves as a leading policyholder firm in Germany – which then attracted several new clients from other industries as well,’ says Wilhelm.
With international reach being an increasingly important factor for firms, and one that boutiques are traditionally not as well equipped with as larger competitors, this visibility might provide them with the edge needed in order to carve out a larger share of the market. The growth of Wilhelm Rechtsanwälte during the pandemic appears to reassure clients that highly specialised boutiques have the capability to challenge international powerhouses, as opposed to losing out because of the pandemic.
While the competition that independent German firms and boutiques face from international firms gaining footing in the domestic German market is not a new challenge, Arnold and Schwarz identify the expanding legal branches of large auditing and consulting firms as potentially threatening for a host of national players. The impact of this, however, remains to be seen and there has been no indication so far that the pandemic has sped up such processes.
Do the right thing
Another key area that has gained momentum since the arrival of Covid-19 is the demand for ESG-related work. Whether that be green shipping or the issue of the first green bonds in Germany last year, the sustainability boom has now reached every corner of the market. According to Ritvay, this is in part because ‘compliance and litigation risks are materialising and because ESG compliance even impacts the ability to raise capital’. Having a stronger power over economic developments than ever before, issues of sustainability, ethics and human rights are shaping the way independent firms operate. Similarly to digitalisation, they not only impact client work itself, but also how firms present themselves and how they do business behind closed doors.
‘For domestic firms that lack high-end specialisation in certain fields, the market entry of major international firms in Germany with all their marketing power is a huge challenge.’
Mark Wilhelm, Wilhelm Rechtsanwälte
Changes in legislation are pushing this demand even further. The supply chain act, set to take effect in 2023 and aimed at holding companies accountable for ethical working conditions along the whole of their supply chains, is already keeping German firms busy. This is just one of the examples of how ESG will only further occupy companies in the future, and law firms along with it. Even now, it is becoming increasingly clear that such issues will require the more holistic approach mentioned by Lepique and Sengpiel. This is seconded by Schwarz and Arnold, who say they ‘expect an increased demand for legal advice on complex questions that require more than one area of expertise as many developments in the market touch various areas of the law and therefore need to be addressed with a multi-disciplinary approach’.
The pandemic has proven that the German legal market is characterised by resilience and adaptability. As many of the leading independents have reported a record year, their model seems to be well equipped for providing specific solutions in a fast-changing environment. For Ritvay, this is precisely what gives them an edge over their competitors: ‘We co-operate with the best firms in each jurisdiction with an unmatched depth in their markets and we are able to tailor the team exactly to client needs.’ Noerr has a solid track record of revenue growth over the last decade, having more than doubled its turnover over that period. Its most recent financial performance was particularly strong, increasing turnover by 8% to €271.6m, while revenue per lawyer rose 5% to €553,000.
Projections speak of up to 4.1% of GDP growth in Germany in 2022. If the problems surrounding delivery bottlenecks manage to wane, the economy might see lasting recovery effects. Given the recent federal election, changes are difficult to anticipate, say Arnold and Schwarz: ‘It remains to be seen which consequences the new coalition government will bring and obviously, the economy as a whole is awaiting the results of the coalition negotiations.’
Firms generally expect a stable market for the next year, but the pandemic has shown that economic upheavals can be abrupt and unpredictable. As it stands, German independents and boutiques have largely profited from the last year and a half. With currently no end in sight for the pandemic, their growth is set to continue. LB