How Recessions Affect the Legal Industry
With Brexit complications, a slowing Chinese economy and a US - China trade war, a recession is becoming a looming possibility. This poses the question: How will the legal industry respond to a domestic or global recession?
A recession is classified as a significant downturn in the economy for at least six months. Five key economic indicators identify recessions. These are real gross domestic product (GDP), income, employment, manufacturing, and retail sales.
The expected response
The reality is that the legal industry is typically more recession proof than most. There may be a preconception that legal work would become ancillary for most business’ undergoing downturn. However this isn’t completely accurate. Many corporations will continue to work with the legal industry however instead of high value mergers, attention turns to insolvency, bankruptcy, restructuring and litigation work. Because of this, larger firms with more diverse practice areas typically respond better to recessions.
Despite this, the global financial crisis of 2007-9 still hurt the legal industry. This is because there was insufficient work to compensate the simultaneous downturn in financial, transactional and other high ticket work. Furthermore, strategies used post GFC such as increasing fee rates, shedding staff and tightening equity partner ranks may not be so effective in the current legal climate. The rise in alternative legal service providers has led to a shift in demand away from traditional law firms towards cheaper substitutes.
The big six law firms are not expected to be hit the hardest by a recession. These firms typically have wide practice areas. They are also mostly integrated with alternative legal providers (ALP’s). However, highly specialised boutique and medium tier firms with a traditional partnership agreement model are expected to struggle. The billable hours, high profit per partner and substantive bonuses are all indicators of a traditional business model which would struggle through economic downturn. So the question becomes, how do law firms prepare for a recession?
How to prepare for a recession
There are four key methods to prepare for a recession.
Countercyclical practice areas
This means during economic downturn a law firm can remain profitable by maintaining practice areas which are in high demand during periods of economic deterioration. For traditional firms, this involves broadening practice areas to accomodate areas such as insolvency or restructuring. Another method of achieving this is to cross train lawyers in various practice areas to handle matters on both ends of an economic cycle.
Integrate alternative legal service providers
The growth of legal tech and alternative legal services is indisputable. This means traditional firms need to begin adopting similar capabilities. Or partner with ALP’s to take advantage of the demand for cheaper services during recessions.
Be ready to downsize
The legal consulting firm Altman Weil suggests law firms become flexible with staffing. This involves preparing to assign lawyers from one practice area to a more active area. An alternative but less effective approach is simply cutting staff.
Ensure the firm has adequate capital
Firms that have sufficient capital when entering a recession are able to capitalise on opportunities. This involves expansion through lateral hires and merges. This is easier during economic downturn as many companies are in high need of capital investment.
History suggests the legal industry is more resistant to a recession than many others. However, it isn’t free of impacts, with traditional legal firms hit the hardest. The firms with diverse practice areas and tech oriented business models are best prepared to weather the storm. Regardless of their industry position all firms can utilise the methods above to prepare for a recession. For businesses seeking legal services during an economic downturn they should seek fixed fee lawyers to combat the high cost of billable hours.
Gopi currently works in the content team as a Legal Intern for Lawpath. He is in his fourth year of a Bachelor of Law and Commerce (Accounting) at Macquarie University. Gopi is interested in cyber law and future innovations in the legal industry.