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April082021
The Pandemic Paradox: Law Firm Profits Rise Despite COVID-19

Christopher Imperiale, CPA

4.8.21 | Practice Made Perfect

A year in, clear winners and losers have emerged from the COVID-19 crisis. Online retailers such as Amazon, delivery apps like Instacart, and meeting apps such as Zoom have taken off.  At the same time, restaurants and retailers that largely depend on foot traffic, like JC Penny, Brooks Brothers, and Neiman Marcus, have had to file for Chapter 11 bankruptcy protection. Yet often overlooked in all the talk about the pandemic’s winners and losers is the effect on major law firms.

A Banner 2020

And by all indications, law firms belong in the ‘winners’ column as partner profits reached new heights in 2020. It is being popularly described as the Pandemic Paradox: The uncertainty created by the economic downturn created higher demand for legal services. Practice areas focusing on restructuring, capital markets work, and litigation have been in high demand throughout the pandemic. A recent report by Thompson-Reuters found that among the top 100 American law firms, profits by equity partner (PEP) grew by more than 20% in 2020.

Factors Driving 2020 Growth

The 2020 upturn in profits can be attributed to many factors. Major law firms were able to tighten the staff-to-lawyer ratio. Some estimate that firms were able to reduce overhead costs by between 5 and 6%. Firms were particularly well placed to benefit from the COVID-19 public health restrictions. Lawyers were able to work from home offices and firms benefited from the overall reduction in travel expenses. Time not spent waiting at the airport or traveling across the country could now be spent on accumulating billable hours.

Ultimately, the administrative belt-tightening was not accompanied by a significant loss of billable hours. Still more, approximately 50% of law firms availed themselves of the Paycheck Protection Program, while another 40% deferred compensations to associates and staff. Taken as a whole, cutting expenses, administrative reductions, and maximizing government programs clearly paid dividends in terms of PEP growth. According to a report in the Wall Street Journal, big law firms’ net income increased 25.6% in 2020.

Leveraging Lessons from the Great Recession

A decade ago, firms reacted to the Great Recession by making deep cuts to lawyers and staff which created problems once the economy got back on track and business picked up again. This time many law firms took a more flexible approach. Instead of slashing lawyers and administrative staff, firms opted for furloughs and salary cuts. Once it became clear that business was far from slowing down, firms were able to adjust and take advantage of the boom in requests for legal services.

One prominent example is that of New York’s Cadwalader, Wickersham & Taft LLP which, as the crisis was getting underway in March 2020, halted distributions to partners and pared back salaries for lawyers and staff by between 10 and 25%. Yet by August, the firm bounced back and restored everyone’s pay.

That being said, it hasn’t been all good news. Some of the country’s largest firms were forced to make cuts to staff. Skadden, Arps, Slate, Meagher & Flom LLP reportedly laid off 4% of its professional staff, while Baker McKenzie, one of the country’s largest laws firm by revenue, cut 6% of its employees in North America.

Some firms were able to quickly identify opportunity in crisis. Baker Donelson was quick to establish a coronavirus resource center which helped clients track new COVID-19 regulations on a state-by-state basis. Firms also found clients were eager for guidance through the thicket of new laws and regulations that came about by the federal government’s response to the pandemic in legislation such as the CARES (Coronavirus Aid, Relief, and Economic Security) Act.

Opportunities Abound for 2021

With 2021 well underway, we will continue to see some intriguing growth trends at law firms continue to adjust, change and reconfigure. Firms have been forced to reevaluate spending on some discretionary items, such as marketing and advertising, entertainment costs, among other areas. Some of the savings in these areas may be better spent in the areas of technology and cybersecurity protection as remote working continues and different forms of hybrid offices and new types of work schedules evolve.

As office leases come due, management will need to evaluate space needs. We have seen some firms move certain administrative personnel as well as attorneys to full time remote during the pandemic, opening up an opportunity for the firm to reduce its footprint in certain high cost areas.

With that in mind, many firms are still evaluating work from home policies and the potential long-term effect on culture and talent development.

While firms navigate through their real estate needs and look for the right balance, the marketplace may see further consolidation through merger activity. Firms who emerged stronger from the pandemic will likely attempt to leverage that strength by pursuing merger and acquisition opportunities.  Nevertheless, traditional merger considerations such as leadership, culture, client profile compatibility, compensation, and financial needs among others will still factor into any decisions.

Another avenue that might see busier traffic may be the increased use of contract attorneys hired to handle a specific case or several cases. Typically, the attorney agrees to perform the work pursuant to a specific agreement and can be let go upon completion. As a further benefit, the use of contract attorneys enables the firm to manage its headcount more efficiently.

While many firms still struggle to create a truly inclusive and diverse workforce, some are setting diversity and inclusion goals. These firms recognize that an inclusive legal workforce could improve community relations with diverse professionals better able to understand and appreciate the experiences of a broad range of individuals. Moreover, it may make the firm more attractive to be retained by a wider variety of clients.

As the year progresses, it is clear that opportunities for law firm growth will continue to present themselves, and it is up to leadership to determine the next steps to take.

If you have questions, contact Christopher Imperiale at 212.331.7590 | cimperiale@berdonllp.com.

Berdon LLP New York Accountants

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