Law GovLaw Gov

    Subscribe to Updates

    Get the latest legal news from from all around the world directly to your inbox.

    What's Hot

    The Asia Legal Briefing: Do British Firms in Asia Suffer From an Identity Crisis?

    August 12, 2022

    Destroying the Myth of the ‘Gladiator’ Lawyer

    August 11, 2022

    Freshfields Adds Ropes & Gray Partner for Second London Lateral Hire in a Week

    August 11, 2022
    Facebook Twitter Instagram
    Law GovLaw Gov
    • Privacy Policy
    • Guest Post
    • Terms
    • Contact
    Facebook Twitter Instagram
    SUBSCRIBE
    • Home
    • News
    • Law Firms
    • Legal Technology
    • Law Practice
    • Litigation
    • Regulation
    Law GovLaw Gov
    Home » Facing a Potential Recession, Big Law Is More Adept at Weathering a Crisis

    Facing a Potential Recession, Big Law Is More Adept at Weathering a Crisis

    July 7, 20226 Mins Read Law Firms
    Facebook Twitter Pinterest LinkedIn Reddit WhatsApp
    Share
    Facebook Twitter LinkedIn Pinterest WhatsApp Email

    After two years of record-setting financial results, Big Law is facing headwinds as the economy teeters toward a potential downturn. But law firms may be better prepared this time around.

    Analysts say firms overall are better equipped financially to handle a recession now than they were going into the Financial Crisis of 2008 due to a number of factors, including maintaining lower levels of bank debt and raising more capital from partners. They’ve also become more agile—and confident—after the last two years of the pandemic.

    The economic tumult of the late 2000s put focus on liquidity, and law firms generally responded by fortifying their balance sheets. Now, firms are significantly less leveraged now than they were before the Financial Crisis, said Michael McKenney, a senior client adviser and business development officer at Citi Private Bank Law Firm Group.

    Their balance sheets are stronger, the quality of the funding is higher, and to the extent they need credit, they have more guaranteed now than before.

    According to figures from Citi Private Bank Law Firm Group, the average large law firm in 2007 had $70 million in committed credit. Today that number has almost doubled to $135 million.

    Law firms also used the decade following the crisis to reduce their reliance on bank debt and raise additional capital from their partners. The average debt level for firms with 600-plus attorneys was about $12 million in 2007. Now it’s less than $7 million.

    Meanwhile, partner capital levels have also more than doubled for the average big firm, according to Citi’s figures, from less than $70 million in 2007 to about $145 million by the end of last year. To further illustrate the point, the average paid-in capital per equity partner was $285,000 in 2007. By the end of 2021, it was $618,000.

    “Our financial leverage, our debt per equity partner, is down significantly. I would also say that our access to credit is much better today than it was in the prior crisis and that, in fact, most firms have locked in committed credit equal to about three months of operating expenses, so they have that ability to weather a crisis,” McKenney said.

    “And they have further reinforced the firm by consistently attracting higher levels of capital from partners over the past decade, and that capital leaves them positioned to weather a downturn,” he added.

    Another move that sets them up better in a recession this time? Those C-suite roles have also evolved since the last recession. Firms have placed more of a premium on getting people from beyond the legal profession to take jobs as executive directors, chief financial officers and chief operating officers, and as a consequence, they have wider and deeper skillsets in leadership.

    “So, frankly, I think they are much more adept at coping with changing environments, crises, than the teams we were seeing in 2007 and 2008,” McKenney said.

    The Confidence Game

    McKenney noted that even though firms were concerned with cash flow at the very beginning of the pandemic, and some increased their lines of credit and withdrew from them in 2020 as a consequence, many also ended up performing so well that they returned the cash. Some even reduced their lines of credit.

    Overall, the industry’s revenue performance over the last two years has put them in even stronger territory if they face another recession, he said.

    “Because cash generation was so strong in 2020 and 2021, firms had the ability to address their balance sheets by paying down debt at year-end,” he said.

    Firms broadly passed one pandemic test by changing to remote work models and adapting quickly. They even found it advantageous for routine activities such as recruiting and closing  client deals.

    That won’t be the primary issue if the economy contracts and demand dries up in certain areas. But having survived and thrived during such a monumental shift in 2020 has arguably made firms and their people more resilient for challenges in 2022 and beyond.

    “You’re not going to fix a recession by working from home,” said Kay Hoppe, a legal recruiter based in Chicago. “But the notion of survival, agility — it seems to me [firms] were empowered by having that experience.”

    Indeed, despite a slow-down in the transactional practices that powered them through much of 2020 and 2021, firms have continued to expand by entering new markets or adding large groups, among other growth signs this year. Many law firm leaders have also said they remain optimistic despite inflation and geopolitical strife, maintaining that their clients are still preparing to spend and that their firm practices are diverse enough to hedge against an economic downturn.

    For instance, firm leaders at Morgan, Lewis & Bockius, which just announced an expansion into Seattle, said that the move reflects the firm’s confidence, both in itself and in the business environment going forward for the rest of the year. They said any time an organization stares down a challenge and comes out of it stronger, it helps build resilience. And that the pandemic, as well as previous recessions in 2001 and 2008, are examples of that.

    Meanwhile, the economic turmoil that can kill deals also boosts areas such as labor and employment and litigation practices.

    “You don’t just always have a smooth ride, but we want to make sure we’re doing things right when [a difficult time] comes,” said firm chair Jami McKeon in an interview. “That philosophy was tested during the pandemic, and we’re fortunate we hung together. That always gives you confidence going forward.”

    Confidence helps during turbulent times. So does increased revenue. But some firms could still have trouble dealing with the residual effects of another defining characteristic during the pandemic era: the competition for talent.

    Jim Jones, director of the Center on Ethics and the Legal Profession at Georgetown University, said a long, deep recession could be particularly painful for some firms that kept up with associate salary increases.

    “A lot of firms followed suit on that in a way they maybe couldn’t really afford,” he said, adding: “I think there were some firms that felt obliged to follow the increases dollar for dollar but don’t have the same strengths. And in an economic downturn, their expenses will grow dramatically…so that economic stress is going to come home to roost if the recession comes.”

    Share. Facebook Twitter Pinterest LinkedIn Tumblr Email

    Related Posts

    The Asia Legal Briefing: Do British Firms in Asia Suffer From an Identity Crisis?

    August 12, 2022

    Destroying the Myth of the ‘Gladiator’ Lawyer

    August 11, 2022

    Jones Day Latest Firm To Increase London NQ Salary

    August 11, 2022

    Industry’s High Pay Should Be Celebrated, CMS Managing Partner Says

    August 11, 2022

    Adding Fuel to the Fire? Lawyers Say Pelosi’s Visit to Taiwan Unlikely to Create Much of a Ripple for Businesses

    August 10, 2022

    UK Lawyers Are ‘Ready for Rishi’—But Only Because Truss Is ‘A Pound Shop Thatcher’

    August 10, 2022

    Leave A Reply Cancel Reply

    Don't Miss
    Law Firms

    Destroying the Myth of the ‘Gladiator’ Lawyer

    Francesco MazzagattiAugust 11, 20220

    When the Chief Justice of Ontario, Canada’s largest province and home to two of its…

    Freshfields Adds Ropes & Gray Partner for Second London Lateral Hire in a Week

    August 11, 2022

    PwC Legal Advises VDV Packaging on Acquisition of Unipap

    August 11, 2022

    Proactive Steps to Mitigate Liability Risks to Your Practice

    August 11, 2022

    Subscribe to Updates

    Get the latest legal news from from all around the world directly to your inbox.

    Our Picks

    Karanovic & Partners Advises Hidden Harbor Capital Partners on Acquisition of Dayco

    August 11, 2022

    Wardynski & Partners and Deloitte Legal Advise on Bio-Rad Laboratories’ Acquisition of Curiosity Diagnostics

    August 11, 2022

    Jones Day Latest Firm To Increase London NQ Salary

    August 11, 2022

    Industry’s High Pay Should Be Celebrated, CMS Managing Partner Says

    August 11, 2022
    Law Gov
    Facebook Twitter Instagram Pinterest
    • Privacy Policy
    • Contact
    • Guest Post
    • Terms & Conditions
    © 2022 Law Gov. All rights reserved. Developed by Sawah Dev.

    Type above and press Enter to search. Press Esc to cancel.