Economic Pressure Is Bearing Down on Law Firms

Although law firms managed to end 2020 on a high note despite the pandemic, market dynamics could pose a significant economic challenge to the firms in 2021. Legal observers and leaders have noted with concern that economic pressures — such as rate pressure, cash-strapped clients, and rising expenses — might bear down on the firms in 2021.

Rate Pressure

Since the Great Recession, raising rates has been a prominent feature for Big Law firms. The annual rate increase during this period has been around 3% on average. The ability to increase rates has enabled law firms to sustain profitability. Firms were able to increase rates just before the COVID-19 pandemic. Peer Monitor data shows Am Law 100 firms had raised rates about 6% higher compared to April 2019.

According to recent research conducted by Burford Capital, 50% of all lawyers expect shrinking client budgets and revenue. With the economic repercussions of COVID-19 not yet over, clients have to forecast how much the pandemic will affect their bottom lines. Corporate legal departments are looking for places to trim their budget to meet their 2021 goals. Consequently, it might be harder for law firms to raise rates at similar levels to those they have been achieving in the recent past.

Increased Expenses

In 2020, nearly all law firms had to increase the efficiency of their work processes, such as:

• In-person meeting
• Business travel
• Staffing
• Physical office space

As a result, they significantly lowered their costs. In 2021, however, law firms are expected to see their expenses rise again. Employees are expected to return to the office. Travel is also likely to increase. Firms taking a conservative budget approach are preparing 2021 budgets as though business travel and conferences will carry on as they did in pre-pandemic years. 

Post-Pandemic Planning

Having learned from the mistakes made during the financial crisis of 2008, firms should come up with more effective solutions to the economic challenges. For instance, in response to the crisis, firms started laying off employees in mid-2009. When client activity started to pick up, Chicago legal recruiters saw that the firms that conducted layoffs were less capable of serving clients and generating revenue. Therefore, this time around, firms need to prioritize talent retention while looking for other effective ways to ease cash flow.

An annual Citibank report shows that the law firms that performed exceptionally in 2020 had a diverse practice mix. That suggests that firms should focus on creating a diverse industry and practice mix.

According to the International Monetary Fund (IMF), the COVID-19 pandemic will lead to a cumulative output loss of more than $12 trillion in 2021. Law firms have to adopt innovative ways to manage risk and legal costs as well as deepen relationships with their current client base while trying to attract new ones.