Brace yourself: The legal business forecast looks bleak

(Reuters) – The latest legal business numbers are alarming: Law firm expenses are up, profits are down and demand is shrinking.

This trifecta of gloom comes from the Thomson Reuters Law Firm Financial Index, which analyzes quarter-over-quarter changes in rates, demand, productivity, expenses and other factors that influence profitability at large and midsize law firms. As my colleague Karen Sloan reports, the index just fell to its lowest point since its 2006 founding.

The decline is so steep in part because the 2021 highs were so high. In that sense, the economic indicators aren’t quite as dire as they might seem — and may explain in part why we haven’t seen overt law firm layoffs, even as companies including Tesla Inc, Netflix Inc and Walmart Inc have been shedding workers.

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Still, recruiters and career coaches tell me lawyers would be wise to take steps now to “recession-proof” themselves before any axes fall.

Per the report by the Thomson Reuters Institute, which is part of the same parent company as Reuters, demand for M&A work fell 4.9% in the second quarter of 2022 compared to a year ago.

Litigation fell too, by 2.2% — defying conventional wisdom that the practice is counter-cyclical and goes up when the economy goes down.

Also in decline: bankruptcy, labor and employment, tax, intellectual property and general corporate work. Only real estate showed a modest uptick, an indication this downturn is different from the one in 2008-2009, when turmoil in the financial services market decimated real estate work.

One bright note: Billing rates were up 4.7% — but then again, inflation is currently about 8.5%, so perhaps that’s not actually so impressive.

So far, it seems the pain felt by law firms is spread unevenly. At Morgan, Lewis & Bockius, for example, chair Jami McKeon told me via email that the mix of work “has shifted somewhat,” but that the firm’s year-to-date numbers look better than in 2021, which saw revenue of $2.58 billion, according The American Lawyer.

At Orrick Herrington & Sutcliffe, chairman Mitch Zuklie said transactional demand “is off last year’s torrid pace,” but the firm’s “trial docket is on fire.” The market, he said, “has certainly shifted to a more uncertain environment.”

The report authors caution that there’s no need to panic — or at least not yet.

“Much like a lane-departure system on a modern car, the (index) does not exist to signal when the car has crashed. Rather, it serves as an early warning for when firms drift away from profitability growth,” the report states.

As an image, that’s not exactly reassuring. I’m now picturing a car veering off the road, about to smash into a tree.

Consider yourselves warned. The question is, how might individual lawyers shield themselves from the impact?

Legal consultant and coach Jay Harrington, president of Harrington Communications LLC, told me that his clients are increasingly expressing “a sense of unease and wariness” when looking ahead.

Last year, he said, “the valuable skill firms were searching for was legal talent capable of billing hours on an abundance of work. That’s why hiring surged, and bonuses and salaries went through the roof.”

Now, with less work go around, the ability to keep one’s nose to the grindstone may not be enough.

“Firms will be looking for lawyers to step up and generate more work to keep themselves and others busy,” Harrington said, suggesting that lawyers devote 30 to 60 minutes a day to marketing and business development. “The time to take action is now, not when it becomes an urgent necessity.”

As a starting point, lawyers should ask themselves, “How do I remain visible and consistent, to be top of mind when clients have a need for services?” he said, noting that in-house counsel may have five or six firms in their ecosystem to tap for work. “The lawyer who is visible gets the opportunity.”

Isabel DuPree, a director at VOYlegal in Atlanta, doesn’t see “massive layoffs” ahead, but added that associates who “don’t try to stand out and do well may be the ones who suffer.”

DuPree, who started her law career as a corporate associate at the onset of the 2008 downturn, thinks firms learned hard lessons then, as well as during the short-lived fall-off at the beginning of the pandemic.

Those that cut too deeply found themselves short-handed when business roared back, with reputational damage to boot.

Indeed, after Latham & Watkins in early 2009 fired 190 lawyers and 250 other employees, the term “lathamed” became an entry in the Urban Dictionary: “To layoff the majority of First Year Associates in one office after only several months of work, before they even have any real written reviews.”

A Latham spokeswoman declined comment.

To Latham’s credit, at least it was forthright about its layoffs instead of trying to pass them off as performance-related.

More than 4,000 lawyers and 7,000 staffers lost their jobs in 2009, according to a report in the ABA Journal.

This time around, perhaps more firms will recognize that if they eschew widespread layoffs, any temporary hit to profits per partner is likely to be rewarded in the long term when business comes back.

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