2020 law firm revenue and profits were stronger than anticipated
The pandemic created unexpected challenges for the legal industry, but law firm performance was stronger than anticipated, as reported in the Citi Private Bank and Hildebrandt Consulting 2021 Client Advisory. The uncertainty that defined the early months of the pandemic caused law firm business—especially litigation and transactional work—to slow in March and April. Many firms anticipated cash flow shortages due to difficulty in collecting on client bills—a fear that remained largely unmaterialized—and proactively cut expenses. Overall, a strong first quarter of the year and higher profitability resulted in better-than-expected law firm performance in 2020. However, the results of last year are not necessarily sustainable, because firms’ proactive expense cuts (e.g., reduced travel and partner meetings, staff reductions, etc.) helped offset a general business slowdown. As some of these expenses begin to return, firms should expect to return to a more normal growth cycle in 2021.
Firms will continue to invest in technology (and cybersecurity)
When offices and courts closed in March, law firms continued to conduct business by quickly transitioning to remote work with new investments in technology. While the legal industry had almost exclusively relied on in-person interactions in the past, for the last year almost all business has been conducted via video technology. Litigators are now more willing and more comfortable interacting with these technologies and there is no doubt that firms will continue to invest in technology as offices reopen.
With increased reliance on remote technology, however, attention to cybersecurity is even more critical. Law firms are new to the space and as such, they are soft targets for potential attacks, especially now that the majority of their staff are working remotely. As a result, many law firms are now developing cybersecurity practices and will continue to make investments in this area in 2021.
Practice group and matter profitability are important factors to compensation
Historically, law firms conducted profit reviews of each partner to determine compensation—a flawed process that almost always led to partner departures. Increasingly, firms are moving away from this outdated system and instead looking at the profitability of matters, clients and industry groups to see how partners are functioning. Firms that successfully transition to a more modern compensation model have one thing in common: They avoid making the system too complicated. Instead, they simply look at what a partner is responsible for and evaluate performance through a holistic review of responsibilities.
The lateral market is not dead
Throughout 2020, there was speculation that the lateral market would dry up as a result of the pandemic. Contrary to that misconception, the lateral market is increasingly active globally and especially in the US. Some of that activity has been driven by firm consolidation, which will likely continue into 2021. Also indicative of this trend is the growing lateral market among large firms in New York and London, which previously did not see this level of activity.
Mid-size firms need a defined strategy to compete and succeed in the year ahead
Mid-size firms will be challenged by increased demand for global business in 2021, but strategic firms can still compete with their larger competitors. For mid-sized firms, profitability, partner productivity, specialty and close client relationships will be the pillars of success. Today, firms are hired by specialty, and given that mid-size firms may not be able to build out a specialty internally, those which previously rejected mergers or other combinations may reconsider. As a result, the industry will see more consolidation among smaller and mid-size firms evaluating their standing relative to competitors.
2020’s disruption sparked an appetite for innovation among firms and legal departments
Crisis tends to beget litigation, and the disruption resulting from Covid-19 is no different. As a result of the pandemic, the litigation ecosystem will certainly have more work going forward, and it will be interesting to observe the opportunities to innovate that arise, including the evaluation of remote work, new technologies and how to finance litigation.
Managing liquidity with legal finance
At the beginning of the pandemic, there were serious liquidity concerns and a growing interest in learning more about legal finance as a tool to manage liquidity. Burford recognized this interest as an opportunity to accelerate the education of companies and law firms about legal finance as a cash-management tool.
Problem-solving with risk-sharing
Litigation is ultimately about solving a set of problems for clients, and clients increasingly have come to expect more customized solutions. Compared to the 2010s, Burford has seen an increased appetite for risk-sharing among clients and significantly more interest in large monetizations—accelerating proceeds on a claim or award before the case resolves, as distinct from traditional fees and expenses funding.
The diverse legal funding structures available today provide corporations and the law firms that serve them another tool to manage liquidity over time by controlling the timing of cash flows and creating budget certainty.
Looking ahead: Keys to success in 2021
While it will be difficult to replicate 2020’s arguably artificially high profitability, 2021 is poised to be a positive and innovative year for the legal industry.
To secure success in the year ahead, law firms should ensure they have a strong plan focused on profitability, seek to improve client relationships and identify opportunities for specialization and innovation. For firms focused on litigation, the timing of courts will continue to be an issue, which will push firms to seek more risk-based opportunities to manage cash-flow. That willingness to innovate will undoubtedly contribute to, if not define, firms’ success.