How will the legal industry be affected by the next recession? The thought came to mind several times recently as the stock market recorded its worst December since the Great Depression. Stocks have rebounded during the early weeks of 2019, but political turmoil at home; Brexit and its chaotic implications for the UK, Europe, and beyond; the slowing Chinese economy and the threat of a U.S.-China trade-war; and other destabilizing factors remain. So too does the question of what happens to legal providers when the other shoe drops again.
The Impact of 2008
One way to predict the future is to examine the past. How was the legal industry affected by the events of 2008 and its aftermath? Ten years after the collapse of Lehman Brothers and the global financial crisis it precipitated, the contours of today’s legal landscape remain superficially similar to the pre- 2008 marketplace. Sure, Cravath’s stunning offer in 2009 to pay incoming $80,000 to incoming lawyers to defer their starting dates for a year shook up the industry for a while. But that and other post-crash fallout has been relegated to ancient history in a world fixed on the here-and-now. What could be so bad? The Citi Report, an industry bellwether, proclaimed that 2018 was “the best year for Big Law in a decade.”
The traditional law firm partnership model persists, and so too does the billable hour, rising rates, high profit-per-partner (PPP), escalating starting salaries, and hefty associate bonuses. Many in-house legal departments continue to operate as captive law firms, mimicking law firm culture. All legal service providers that are not traditional partnership model law firms are collectively lumped together and called “alternative legal service providers” (ALSP’s).
The self-regulated U.S. legal market, the world’s largest, continues to resist re-regulation (adopted in Australia, the UK, and other advanced economies). “Non-lawyer” investment, ownership, and control of law firms as well as multi-disciplinary practice is prohibited except in the District of Columbia. The access to justice crisis persists as does law’s distribution problem–most individuals and U.S. businesses cannot afford legal representation at current rates even as tens of thousands of lawyers are unemployed or underemployed.
On the surface, the legal industry has undergone modest change during a decade of unprecedented pan-industry disruption. A closer look reveals a different perspective– systemic changes are reshaping the legal industry, albeit more gradually than the “disruption” many pundits had predicted. Some key transformative currents include: (1) a shift in power from providers to consumers; (2) new providers; (3) new skillsets—law is not solely about legal expertise anymore; (4) technological adoption; (5) the practice of law and the business of delivering legal services; (6) infusion of capital (funding law companies, litigation finance, legal tech investment, etc.); (7) multi-disciplinary problem solving; (8) law firm hegemony over; (9) ascent of legal professionals/legal operations; (10) the rise of data and digital transformation; and (11) an emerging global legal community.
The last ten years have not produced “the end of lawyers,” but they have witnessed law’s transformation from guild to emerging global legal marketplace. Change has been propelled principally by legal consumers– not law firms– and by entrepreneurs, business and technology experts focused on improving the “delivery of legal services,” not legal experts/practitioners. The influx of expertise from other disciplines—as well as institutional capital– into the lawyer-centric ecosystem has produced new delivery models that are better aligned with consumers and that reward efficiency, predictability, cost-effectiveness, value and results. Law is no longer about scorched-earth labor intensity and lawyers decreeing that’s what necessary to produce the best legal product possible. It’s about problem solving at the speed of business.
New model providers have ignited a cultural transformation that embraces diversity; the potential of technology to help solve law’s wicked problems; the importance of collaboration and scale; the upside of automation; the predictive prophylactic, and analytical uses of data to substitute information for hunch; the power of capital; the importance of access; and the need to realign the interests of consumer with provider. During the past decade the legal industry has begun a transition from “lawyers know best” to “legal consumers engage providers that can best resolve their business challenges.”
The Industry After The Next Major Recession
How will the next major financial downturn affect the legal industry? It’s too speculative to pick individual winners and losers, but industry trends and evolving legal buy/sell dynamics make it easier to predict which categories and characteristics of providers will fare better or worse during the next economic downturn. Spoiler alert: providers that have embraced digital transformation will fare far better than those that have not.
The next recession will be a reckoning for most large law firms, especially those that have kicked the existential “who are we?” can down the road. That’s most firms. They continue to pursue a short-term strategy focused on preserving PPP at all costs and have yet to pay the price for it. The next financial downturn will be harsh on those firms that have failed to differentiate and to embrace a client-centric approach predicated on measurable results, efficiency, value, cost-effectiveness, proactivity, collaboration, and transparency. The trend lines are already pointing in this direction. Most firms are experiencing flat or declining demand for their services, stiffer competition—not only from other firms but also from in-house departments and a growing array of ALSP’s including the Big Four—and a “talent gap” fueled in part by promising young talent opting out of the partnership sweepstakes. Above The Law recently reported the mass “stealth layoff” by Cahill Gordon of “the overwhelming majority” of senior litigation associates in a particular class. The associates were told they were not partnership or counsel material, provided six months’ notice, and given a portion of their bonus. How’s that for a short-term strategy certain to deflate firm morale?
A cadre of elite, brand-differentiated firms have separated themselves financially because of their stranglehold on high-value, price-insensitive work for which they command premium fees. That is unlikely to change in the near-term. So too will firms that have differentiated, digitized, and integrated practice and delivery expertise prosper even during the next downturn. There will also be opportunity for law firms that create new organizational and economic models that are corporate, client-aligned, diverse, agile, collaborative, tech and process-enabled, entrepreneurial, multi-disciplinary, and industry-focused to thrive– even in a down market. Legal buyers have crossed the Rubicon and have overcome their reticence to engage new-model providers responsive to their needs. Law is a more open marketplace than ever.
Corporate Legal Departments
In-house departments, like law firms, are by no means monolithic. They vary in size, corporate culture, portfolio, philosophy, performance metrics, and management. The financial crisis resulted in a decade of steady migration of law firm work in-house—not just in volume but also in complexity and significance. Will that pattern continue even when the next recession hits? In-house departments are already feeling unrelenting pressure from the C-Suite to “do more with less.” Rather than increase headcount, it’s more likely that many in-house departments will become more creative in slicing and dicing their portfolios and take an even harder look at “who does what?” For many, that would likely result in even less “fat middle” (everything except “bet the company” and commoditized) work sourced to firms, mandates to cap or reduce existing departmental headcount, and more work sourced to ALSP’s. There is already evidence to support this thesis; UnitedLex “rebadged” several hundred professionals from DXC’s legal team and PwC took on approximately 600 of GE’s global tax professionals.
The Big Four have stepped up their presence as major players in the global legal market, and this will no doubt continue in good and bad economic times. They enjoy many competitive advantages over traditional law firms: (1) strong, trusted global brands; (2) deep war chests; (3) digital transformation expertise; (4) strong C-Suite relationships; (5) multi-disciplinary talent; (6) global footprint; (7) strong commitment to ongoing professional training/re-training; and (8) client-centric, long-term approach to professional engagements. They are a safe harbor, especially in turbulent financial times.
Elite, law-centric legal providers like UnitedLex, Axiom, and Thomson Reuters are also well-positioned to expand their imprint, even during down markets. Why? Someone must do the work. They have the track record, brand recognition, global footprint, and financial backing to invest in client relationships and the resources—human and technological—required to sustain them and to deliver consistent, quantifiable results. These providers, like the Big Four, are anything but “alternative” and are positioned not only to survive but also to thrive in the next economic downturn and beyond.
The next major economic downturn is likely to produce the “disruption” that many in the legal industry have been expecting since 2008. Why has industry change been more drip than disruption? It has taken nearly a decade for legal consumers to wrest control of the industry from lawyers and to open up the long closed legal guild to other professionals, paraprofessionals, technology, and capital.
Corporate consumers call the shots now. They have effectively marginalized archaic, self-serving, and protectionist lawyer self-regulation. More importantly, they—not law firms—now determine value, what is and is not a “legal” matter, when lawyers are required, from what delivery model they are optimally deployed, and at what price. This has accelerated disaggregation and paved the way for providers with tech and process-enabled delivery models offering the expertise, resources, capital, diversity, customer-centricity, and competition to incumbent providers to compete favorably for market share in good times and especially in bad ones.
This article was originally published in Forbes.