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In March, as law firms began shuttering their offices and laying off associates and implementing pay cuts, there was fear the legal industry would soon experience the kind of economic collapse it suffered in 2008-09. A few months in, and the news is perhaps better than expected. While there's still a long way to go, law firms are largely surviving.
Large law firms have enough cash to weather the economic effects of COVID-19 for another few months, according to a recent survey of mostly large law firms by Wells Fargo Private Bank. A combination of reduced expenses and carryover in work, along with certain booming practice areas, has meant that the widespread economic devastation experienced in the Great Recession has not (yet) hit the legal industry.
That is not to say law firms are thriving. It comes as no surprise that law firms saw a drop in demand over the last several months. According to the survey, law firms saw over a 10% decrease in demand from this time last year. This is offset somewhat by a stronger than expected first quarter, however. In all, demand is down only 1.4% for the year.
As economies start to reopen, demand may again increase or level off. However, trial and litigation will likely remain slow. On the other hand, demand for bankruptcy, employment, and banking legal work has risen. The good news for law firms is that collections are up for the year. Law firms are focusing on collections to offset lowered demand. If collections dry up, law firms could have trouble maintaining liquidity.
Layoffs, furloughs and pay cuts have helped law firms preserve cash, and law firms continue to profit from work that was generated prior to the shutdown. In addition, while the layoffs were significant, so far the industry has avoided the large-scale mass layoffs that plagued the industry in the Great Recession. The number of associate positions has fallen by less than 1%, although that number does not take into account furloughs and pay cuts. And non-lawyer staff has fallen nearly 5%, most likely due to fewer of those positions being conducive to working from home.
If demand picks up after the current downturn, law firms should be in a stable position. However, it is by no means clear if demand will pick up. In some areas of the country, for example, courts may remain closed until 2021. Certainly, it is a tough time to be in litigation or M&A. In addition, the recent uptick in COVID-19 cases does not bode well for an economy getting "back to normal."
Calling the current economic circumstances good is a bit of a stretch. On the other hand, compared to worst-case scenarios, the legal industry appears to be showing resilience. It remains to be seen how well the industry can handle sustained lowered demand, or if collections will become an issue. It is too early to say that law firms are out of the woods, but it does appear that the legal industry has handled the economic downturn about as well as could be expected so far.