Law Firms

As worst-case scenarios for law firms fail to materialize, some trends emerge, new report says

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With better-than-expected results for 2020, some law firms are prepaying expenses for 2021 and considering how lessons learned from the COVID-19 pandemic will apply in the coming year, according to a 2021 client advisory by Citi Private Bank and Hildebrandt Consulting.

Through the first nine months of 2020, average law firm revenue grew 5% over the same period last year, according to the report, released Tuesday and available here. The growth was largely due to an increase in the value of total hours worked and firms collecting on strong midyear inventory levels.

At the same time, total expenses were down 2.1%, driven in large part by a decrease in operating expenses. Law firm retreats were canceled, travel was curtailed, and major capital spending projects were delayed.

“Our overriding take is that the worst-case performance scenarios feared by the industry at the start of the COVID-19 crisis have not come to pass,” the report said.

The better-than-expected performance is largely due to a strong start to 2020, a quick transition to remote work, and robust performance in certain practice areas, the report said. Those areas include bankruptcy and financial restructuring, litigation, and finance and capital markets activity.

The report is based on surveys of mostly larger law firms with U.S. headquarters by Citi Private Bank and conversations with law firm leaders. and Thomson Reuters Legal have coverage.

The report sees several trends for law firms that have been accelerated by the pandemic.

The transition to remote work during the pandemic will likely create opportunities to rethink office space and configuration. Many law firms have already announced plans to allow a balanced schedule of remote and office work, the report said.

Another likely change is that law firms will rethink the appropriate level of professional support. Some law firms have already cut staff members, and the trend is likely to continue in 2021.

Further adjustments are expected in the number of secretaries, paralegals and hospitality staff, the report said. On the other hand, some jobs that were cut may have to be reinstated as firms reopen offices.

Firms looking to cut lawyer head count “may want to make those decisions based on profitability, rather than seniority,” the report said. In the last recession, junior associates were cut, leading to a later shortage of midlevel associate talent.

“In particular,” the report said, “we note that for firms where their income partners cost more than they generate in revenue, they may want to take a closer look at their income partner ranks.”

Firms may also rethink ways in which they are capitalized to ensure liquidity.

“In particular, we expect some firms to increase their partner paid-in capital levels,” the report said.

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