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Has covid created a divide amongst law firms?

Has covid created a divide amongst law firms?

Max Alexander-Jones

17/01/2022

Reading time: three minutes

In 2020, the British economy suffered its worst annual downturn in 300 years as a result of the coronavirus pandemic. 

Gross domestic product plummeted by 20.4% in April 2020 according to the Office for National Statistics, with no segment of the economy left unscathed by lockdowns and declining economic demand.

Despite a fall in revenue of 4.7% in the legal sector between March and April 2020 however, many magic circle firms boasted revenue rises. For example, 2020 proved to be Clifford Chance’s best year ever. The firm’s 6% increase in revenue was buoyed by, among other things, an international expansion.

Conversely, Travers Smith LLP, a more ‘traditional’ UK firm, saw its profit shares fall by 20%, while net profit shares fell 11%.

Is this indicative of a growing divide between commercial law firms?

Bruce McEwan, president of law firm consultancy Adam Smith Esq. thinks so. He remarked that the legal sector’s 2020 financial results brought about a “whiff of we dare you to match this”, pressuring smaller firms to match profit rates achieved by their big-league counterparts. Such pressure may result in rash decisions being made to not be seen as falling behind.

Amid the fallout from the pandemic, the ‘winners’ appeared to be those, unsurprisingly, with expertise in counter-cyclical areas. These are known as such because they typically become busier during the economic downturn. Such areas include restructuring, bankruptcy and employment law as well as distressed M&A. These are legal fields that are frequently dominated by magic circle and top US commercial law firms.

Further, international expansion proved to be a key factor in the success of high-end firms, particularly within the US market, as demand for banking and litigation expertise surged throughout 2020. 

This means smaller firms are having to bear the brunt of the pandemic, as common sectors that were once booming, such as personal injury, have declined rapidly as lockdowns meant that potential clients stayed at home.

This new divide may also serve to expose the outdated way in which legal services are delivered. As stated by Forbes, technology has become an “operational lifeline” for law firms, and it is unlikely that things will go back to normal after the pandemic.

Bigger law firms seem to have adapted quicker to the shift – using video and telephone software programs as well as artificial intelligence to communicate with clients, international offices and among themselves – a luxury that smaller firms cannot afford. 

However, the extent to which magic circle firms fared better than their silver circle counterparts was called into question when top commercial firms Linklaters LLP and Allen & Overy LLP reduced partner distributions to save cash as well as freezing salaries for junior staff. 

At first glance, this may appear to be the actions of firms struggling to stay afloat during the coronavirus lockdown, but in reality, it is the actions of firms that through previous successes have been able to garner enough capital to stay afloat, something that cannot be said of their smaller counterparts.

Allen & Overy has asked several partners to put cash into the firm so far – an option which restructuring partner Gareth Harris described as always being “in the armoury”. In contrast, smaller firms like KWM quickly died out when partners refused to contribute cash to the firm.

Participation in cash calls is essential in keeping law firms afloat in tough times; the reluctance of smaller firms to contribute as a result of limited finances and structural problems may be evidence that the growing divide could become permanent. 

Of course, the pandemic is not over yet.

Will the spread of Omicron and potential further variants serve to continue such a trend, or will we see the bounce back of smaller firms?

Only time will tell whether this divide between smaller and larger firms is permanent.