Despite daunting challenges, midsize law firms flexed their creativity and agility to prove themselves surprisingly resilient in 2020. The 2021 Report on the State of the Midsize Legal Market from the Thomson Reuters Institute (TRI) looks at how midsize firms weathered the challenges of 2020 and the opportunities that may lie ahead.
An earlier TRI report on the state of the overall legal market concluded that changes to the industry, such as the move to more remote working and greater emphasis on productivity-enhancing tools, are likely to permanently alter the delivery of legal services. The latest report suggests that midsize firms are uniquely suited to take advantage of these shifts due to their value, flexibility and agility.
The beginning of 2020 started strong for midsize firms as they continued the momentum from 2019. As the COVID-19 pandemic started in the spring of 2020, demand decreased significantly as businesses shifted their priorities and courthouses closed. Litigation, which typically makes up about one-third of billings, was down 2.9% due to the courthouse closings and restrictions. However, the second half of 2020 was the beginning of a slow and steady recovery. That trend continued into early 2021. Demand was helped by a surge in personal and corporate bankruptcy filings. The high point for practice demand was bankruptcy, which surged 2.8% during 2020. But all other major practices, such as labor and employment, real estate, IP and tax, finished down for the year.
Moreover, weak demand was offset to some degree by discretionary cost cuts. Office expenses, which make up about 8% of overhead, fell by 25%. Recruiting and business development and marketing were slashed by more than 40%. These reductions, as well as other cost savings, such as travel, contributed to the strong profitability growth even in the face of declining demand. As a result, midsize firms saw average profits per equity partner climb 5.8% in 2020, almost twice the pace of 2019.
Midsize firms will need to closely monitor how current trends are impacting their clients and plan effectively. That will include managing capacity even as demand improves. Midsize firms encountered difficulty balancing those factors last year as midsize firms' productivity fell 2.5% - the worst among any of the tracked law firm segments. This was largely a result of midsize firms not being as effective in matching their headcount against available work.
Data from market research firm Acritas indicates that, while the largest firms boast more top-of-mind awareness with clients, that has more to do with headcount than anything else. Indeed, midsize firms are more frequently recognized for their value and pricing than large firms. So, to capture a bigger slice of the market, the recent TRI report advises midsize firms to build their brands, improve their technology platforms and market their competitive advantages.
For example, they should position themselves to benefit from a resurgence in litigation, after so many cases were put on hold during the pandemic. Following the 2008-2009 financial crisis, nearly every type of litigation matter tracked by Thomson Reuters Monitor Suite saw growth in matter volume for two and sometimes even three years after the economy began to recover. It is too early to predict when litigation work will pick up again but it is critical firms position themselves to take advantage when it does. Additionally, a wave of additional bankruptcy work provides another avenue for midsize firms to grow. Despite government assistance programs, numerous businesses are likely to fold over the coming year.
The 2021 report warns that the window of opportunity may be brief, as it might prove difficult to repeat some of the factors that drove profitability last year. For example, further cost-cutting may not be feasible. To build on the current momentum and achieve long-term success, midsize firms must seize their inherent advantages as soon as possible.
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