A recent Legal Intelligencer story by Andrew Maloney, “Rate Pressure and Rising Expenses Are Expected to Challenger Firms in 2021,” reports that law firms may have weathered the COVID-19 financial storm last year, but firm leaders and legal observers say economic pressures could bear down again in 2021, including increased expenses, rate pressure and cash-strapped clients.
Big Law likely won’t be able to count on government loans this time , either. Overall, firms and analysts are optimistic about business this year. Firms mostly said they expect a return to some version of normalcy by the second or third quarter of the year, according to a report this week from Thomson Reuters and Georgetown Law’s Center on Ethics and the Legal Profession.
At the same time, the pandemic “is likely to continue to pose economic challenges for law firms” this year, the report said, even as vaccines are being distributed en masse. “First, it is not clear that the same tools used by firms to address the crisis since March will be as readily available in 2021. Some law firms may well not enter the new year with the same cash cushions they had from 2019,” the report stated. It notes many firms used the pandemic to increase billing and collections efforts, and as a consequence, may not have as much on-hand heading into this year as usual.
In addition, there’s growing concern about the ability to raise rates this year, while corporate legal departments, with 2021 budget goals, are looking for areas to trim. ”It may be harder to implement the same level of rate increases at the end of 2020 that firms enjoyed at the end of 2019,” the authors added.
James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession and lead author of the report, said he was “dubious” firms could boost rates at the same level they did last year—about 5%. The average annual rate increase for firms since 2008 has been about 3%, he said.
Jones also pointed to a recent Thomson Reuters survey of more than 200 legal departments that found about 89% said holding down outside counsel costs was one of their highest priorities for 2021. He noted that corporations have significantly increased personnel whose job is to oversee outside counsel agreements. According to Reuters’ Legal Department Operations Index, about 57% of companies had people in those roles in 2019. In 2020 that number shot up to 81%. “So, given the economic uncertainties and enormous pressure that companies are under, I would be surprised if they sit still for a 5% increase,” Jones said in an interview.
Joshua Lorentz, a partner at Dinsmore & Shohl who chairs the firm’s finance committee, said the firm ended 2020 “on a solid note” and expects 2021 to be a “net gain” for business. But he said one wrinkle to the budgeting process this year is figuring out where to set rates, as clients try to forecast how much COVID-19 will alter their bottom lines again. “I don’t know that a majority of companies are asking for discounts, but perhaps discounts for new work, COVID discounts. For some clients, we’re willing to lean into that,” Lorentz said.
He said the firm is evaluating which clients needed breaks in 2020 and having discussions about their projections for 2021. ”And with all that information, we’re able to see who needs us to lean in, who appears to be weathering the COVID situation. Then we try to budget conservatively on top of that,” he said. As an example of that conservative budgeting approach, Lorentz said Dinsmore is preparing this year’s numbers as if expenses such as conferences and business travel will still go forward as they would in a pre-pandemic year.
“And if it ends up that things get canceled in February and March and in the summer, then it’s additional profit for the partnership and the attorneys,” he said. “But if we don’t budget for it, and things suddenly get clear, it’s tough to go find the money.”
The Georgetown and Thomson Reuters report noted that “almost all firms” significantly reduced costs by being more efficient about physical office space, staffing, in-person meetings and business travel in 2020, and such drastic changes could amount to a “tipping point” that permanently alters how firms do business.
Lathrop GPM could be one of those firms. Managing partner Cameron Garrison said this week that while he hopes to have a firmwide return to in-person work later this year, “I do expect that our typical work week may look very different once we return to the office.” He said in an email that’s a result of the firm likely continuing to leverage remote work options for its staff.
At the same time, for many firms, the savings created through remote work and reduced travel are likely a one-time deal. “I think the challenge that we’re going to have in 2021 is the very sharp expense reductions that we saw when we went into lockdown. Those expense reductions—they’re not going to repeat, and we’re going to see our expense numbers rising again,” said Michael McKenney, managing director of Citi Private Bank’s Law Firm Group. “So that margin expansion that we saw is unlikely to repeat.”
However, McKenney said many firms are “very, very strong” in terms of how much cash they have on-hand entering 2021. He noted rate increases have been “very steady” since the financial crisis of 2008, and there are plenty of signs COVID-19 won’t hamstring the market this year the way it did in 2020. “The outlook, particularly if vaccine distribution is handled better than it has been initially, is for a fairly vigorous rebound in a level of activity,” McKenney said, noting that some of the most leveraged practices that were hit hard almost a year ago are starting to come back.
“We saw corporate M&A shut down, capital markets activity was reduced, litigation was hampered because it was very hard to take depositions. Juries were not sitting,” he said. “Those things have begun to reopen, and people are doing them very successfully virtually. Corporate M&A is back up, capital markets is back up, so many of our leverageable practices—practices that generate strong hours—are coming back.” Garrison, the Lathrop firm leader, said the long-term economic and societal effects of COVID-19 are still unknown. But one area that could pick up as a result of economic pain in the short term is pro bono.
“While not an economic challenge, I also believe that firms will be challenged with increased pro bono requests due to an increase in people facing financial hardship,” he said. “We are very focused on balancing the pro bono time we can offer to support our communities while increasing the support that we add to our clients.”