2019 Outlook: Big Law Firms Prep for Projected Economic Slowdown

Prosperous times aren’t over yet for major U.S. law firms, but many in 2019 will have to consider how they’ll respond when the economy likely hits a downswing.

After nearly a decade of economic growth, many experts agree that chances are slim for an economic disaster, but a smaller recession is probably on the horizon.

Nearly half of Chief Financial Officers said they believe the U.S. economy will be in recession by the end of 2019, and more than 80 percent believe one will have begun by the end of 2020, a survey by Duke University shows.

“History doesn’t end. We’re due—we just don’t know when,” Wally Martinez, managing partner at Hunton Andrews Kurth, told Bloomberg Law. “The catchword is going to be ‘prudence.’”

Big law firms can prepare by rethinking staffing, slimming down discretionary budgets, and focusing on practice areas that might grow instead of shrink with a possible downturn.

Addressing Overcapacity

Times have been good, although big law firms have never quite returned to the level of prosperity they enjoyed in the run-up to the Great Recession.

The law firm sector is set to grow by between 6 percent and 7 percent next year, according to data released this month from Citi Private Bank Law Firm Group and Hildebrandt Consulting. But the report also cautioned that when “the inevitable downturn does occur” law firms should “realign both their legal and administrative staff to meet lower demand levels.”

“What’s the next big thing that we should be thinking about? People say that to me over lunch or dinner all the time. I’ve been saying, the economy is going to soften at some point, and better to get out in front of addressing your overcapacity sooner rather than after it happens,” Kent Zimmermann, a law firm strategy adviser at the Zeughauser Group, told Bloomberg Law.

Zimmermann said firms quietly are taking a cue from corporate America by looking to get “lean” in advance of a downturn. That means more closely evaluating attorney performance using a combination of common business sense and whatever the firms’ preferred metrics happen to be, whether that’s origination credit, the billable hour, or another factor.

Big law firms would prefer to avoid a repeat of Great Recession layoffs. On one day in February 2009 alone, six major firms cut nearly 1,000 attorneys and staff total.

Though a new recession is very unlikely to reach those staggering proportions, there’s still anxiety in the air for prospective associates, Michelle Fivel, a partner at legal search and consulting firm Major, Lindsay & Africa, told Bloomberg Law.

“Candidates say, what happens if I go to this firm and there’s a recession? Do they reassign their associates? Do they lay them off, and am I going to be the last one in, first one out?” she said.

Experts say an economic downturn could hurt litigation practices first, with clients becoming less likely to initiate litigation or let cases carry on for long. On the transactional side of major firms, “certain types of private equity and M&A transactions may slow down, if history is any guide,” said Zimmermann.

Smart Investments

History indicates that big law firms in the years prior to the 2008 financial crisis grew rapidly and raised their billing rates liberally, without much thought about how they’d keep lawyers employed and the doors open if the tide suddenly changed.

Hunton’s Martinez said he is confident that firms won’t make the mistakes of the past to the detriment of their employees, but his firm is “being particularly thoughtful on expenses” in anticipation of what’s ahead.

He said Hunton is evaluating future expenses on its budget earlier than it typically would to “dig deeper” and ensure funds are going to support firm talent and its strategic priorities in the event of an economic downturn.

According to Martinez, big firms can evaluate discretionary budget costs like conferences, events, and firm office space, not because these costs are unimportant, but because they may not be top priority with a predicted downturn ahead.

“There’s a lot of money that is spent on things that matter, but those things don’t necessarily have to be done right away,” he said.

T. Mark Kelly, chair of Vinson & Elkins, told Bloomberg Law he doesn’t predict his firm will make any radical changes to prepare for a slowdown. But since he began his career as an attorney in the 1980s, and especially since the events of 2008, he has seen major firms get more spend conscious and invested in long-term planning.

“I think you have to keep your eye on the long game,” he said.

Silver Linings

Though the hardships posed by a projected downturn are harrowing, they can also provide opportunities for firms in certain practice areas.

“I do expect there to be a pick up in practices that perhaps haven’t been as robust given the frothy economy, which are distressed debt trading, restructuring practices,” Martinez said. “We’ll be seeing a pick up in those as time goes on as we’re moving into a different environment.”

Fivel said she’s been hearing from firms, especially in the New York legal market, where bankruptcy practices are big business. “We’re seeing firms tell us that they are interested in beefing up those practices perhaps with an eye to what is coming in the next couple of years,” she said.

Experts also pointed to practice areas that are relatively unaffected by market troubles, including healthcare, data privacy, and high-stakes insurance matters. Big law firms could put more of their money into building these groups.

And a downswing could also create new firm couplings through consolidation. The legal industry is on track to see around 100 consolidations this year, according to the Citi and Hildebrandt data.

According to Zimmermann, next year will be another busy firm M&A year, and part of it could be “additional combinations driven by necessity” as firms search for stronger and less downturn-prone merger partners.