No-one knows the robustness or timing of the economic restart, but many now predict a deep second quarter contraction followed by a spluttering restart over the subsequent three. That may underestimate the impact of the shock and the reactions of both client businesses and households.
A dramatic surge in unemployment will encourage households to slash spending. Many clients are focused on conserving cash and rebuilding balance sheets. Aftershocks of reinfections, further lay-offs, tight working capital and insolvencies as businesses struggle to get in shape when activity starts to pick up seem probable.
Nevertheless, Formula 1 fans know that winning races requires not only hard braking into the turn but judging the moment to accelerate on the apex. Anticipating that point by thinking about the themes defining the new path for the global economy will help major law firms get ahead.
Of course, the challenge is distinguishing between crisis-induced short-term change and more permanent shifts. But the themes seem oddly familiar.
1. UP – Tech: Zoom went from 10m users in January to over 200m right now. A different, more virtual way of working is here to stay. Top law firms will be investing in kit and services that improve the quality of their virtual experiences. The crisis has simply added impetus to the pre-existing trend from physical to virtual. Digital legal products will be the new Klondike in a world with increasingly widespread adoption of ecommerce, digital payments, automation, self-service and touchless technology. Smart law firms will double down on their tentative steps into the digital world. Digital health (‘telemedicine’) and distance learning are big winners with implications for investment to minimise travel, improve employee development and support employee well-being (physical, mental and emotional).
2. UP – Flexible working: Has overnight gone from tolerated to mainstream. A winning strategy will embrace that change and figure out how to prosper from it.
3. UP – Insolvency, restructuring & dispute resolution: The 2008/09 financial crisis fueled a decade-long boom in regulatory investigations, arbitration and other disputes. This crisis will follow suit. Failing businesses will need rescues, contract defaults and unpaid claims will need resolution and fraud will need investigations. Well-organised law firms are already focused on gearing up in these areas and shifting resources from less busy areas.
4. UP – Risk management: In the new operating environment people will be scared to come back to work without effective social distancing and public health measures in place. Forward-thinking firms are looking at a range of measures from testing to safe working and hygiene protocols so offices can get up and running. Credit management will need to be tightened to avoid over-exposure to weakened clients and slower collections from those who see their lawyers as low down the list of must pay creditors.
5. UP – Private capital: This crisis is likely to accelerate a decades-long trend from public markets to private capital: private equity, infrastructure and real estate funds. While the equity market has doubled in size since 2000, private equity has expanded six fold over the same period to $2.5trn according to a State Street study. The combination of locked-up investor capital and bargain-hunting opportunities proved potent after the 2008/09 crisis. The same will hold true this time. PE is one of the primary drivers of big law firm revenue and profitability. Expect an intensifying feeding frenzy among top law firms for talent that can deliver the super-sized revenues and deal flow of major sponsor clients.
6. UP – Resilience: In all its forms. Clients will be retreating from global supply chains and moving production closer to the customer. Nations will want to bolster security of food supply, energy and public services, especially healthcare. Is this the end of globalisation? Maybe physically but not virtually. Tech will mean big business continues to straddle the world and need global legal services. Sectors likely to be expanding include healthcare, life sciences, robotics, logistics, IT & cyber security, software, public health & supermarkets.
7. UP – Scale: European M&A in March fell to its lowest level in a decade. But don’t fire or repurpose all your M&A lawyers just yet. As the world gets back on its feet, big businesses look likely to emerge stronger than smaller rivals. Scale matters. They will have the firepower to expand market share; buying up weakened competitors and profiting from distressed asset sales. Also, across the world there will be one increasingly big potential client, too – the state. All this – combined with private equity bargain-hunting – points to a swift rebound in M&A once things start to settle. Competition, procurement and data privacy lawyers are also likely to be in demand. This suggests further consolidation of law firms. Existing trends towards specialism, tech enabled work and ‘winner takes all’ hiring suggests the strong are likely to emerge bigger and stronger.
And the Downs?
1. DOWN – Business travel: People will still travel when the world gets back to normal but a combination of climate change concern and adoption of tech (see 1. Up above) is likely to see a permanent downwards trend in business travel.
2. DOWN – Office space: Flexible working means the days of big, expensive offices for law firms in the centre of big, expensive cities are numbered. People will always need to meet so office space will survive but not as we know it now. At least one London law firm has mulled over a hub and spoke model with a smaller (still glitzy) office in the centre and smaller hubs around London in key commuting areas.
3. DOWN – People as units of production: This crisis has exposed the need for law firms that want to recruit and retain the best talent to invest in treating them as humans. A more distributed way of working means a heavy investment will be needed to provide meaning and purpose to people, to build bonds of loyalty and to safeguard their well-being.
4. DOWN – Bad leadership: This crisis has demonstrated the critical importance of quality leadership. Corporate clients have been investing in leadership development for decades – GE’s Crotonville management training centre opened in 1956 – expect to see law firms start playing a more energetic catch up.
5. DOWN – Oil: The oil industry has taken a hammering and looks unlikely to recover past glories.
6. DOWN – Data privacy: Virus tracking apps may increase public acceptance of data surveillance and sharing for the public good. But tensions with civil liberties will remain and require increasing sophisticated legal expertise to resolve.
7. DOWN – Karaoke: Who wants to put a communal microphone to their mouth?
Aside from reduced pressure to sing Wind beneath my wings to drunken colleagues, the emergence from the current crisis is certain to lead to a dramatically-changed environment. The law firms with the nerve and balance sheets to think ahead will be those surviving and then rapidly thriving.
David Morley was senior partner of Allen & Overy between 2008 and 2016, leading the Magic Circle firm through the banking crisis. He provides strategy and leadership consultancy to law firms globally