What the Recession May Mean for Law Firms

The forecast is foreboding -- recession ahead -- and everyone is scrambling for safety. But what does is mean for the legal profession?

Some experts believe the legal profession is recession-proof; in good times and bad, there is always a need for lawyers. But others say the demand for legal services is already declining and could drop even lower in a recession.

Most agree, however, that law firms have learned from the errors of the past and are now better equipped than ever before to handle an economic downturn.

"The legal industry is more recession proof than most," says Peter Zeughauser, founder of management consulting firm Zeughauser Group. "Clients will have legal needs in down times and have legal needs in up times -- they may be different needs, but they'll have them. As a service business, the legal industry is generally recession proof."

Practice areas likely to remain healthy even in a recession are litigation, intellectual property, restructuring and bankruptcy, Zeughauser says. Those likely to slow are transactional areas such as mergers and acquisitions and private equity work.

Zeughauser's perspective is one shared by many -- litigation will remain strong while major transactions will taper. But a just-released report concludes that a confluence of economic factors could challenge that conventional wisdom.

The January 2008 Client Advisory jointly issued by Hildebrandt International and Citi Private Bank finds that the current economic downturn is hurting the legal industry across all practice areas.

"In a sense, the current downturn has thus far been a 'perfect storm' in which finance, transactional, and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself," the advisory cautions.

Still, that downward trend is likely to turn up as the recession deepens, at least for litigation, says one of the advisory's authors, Danilo S. DiPietro, head of the Law Firm Group at Citi Private Bank in New York. "There is already some evidence that high end litigation and investigatory work are picking up."

The reason litigation remains strong during a recession is no surprise. Even when the economy is down, companies still want to sue each other, notes John A. Jordak Jr., a partner with Alston & Bird in Atlanta. "In fact, companies might be more inclined to sue if the economy is down."

In his focus area of securities litigation, that also holds true, Jordak says. "Class actions are filed typically when the stock price of a company takes a nose dive. If the market is jumpy, you'll have more of those cases filed. So a recession can often mean an up tick in our work."

FIRMS BETTER PREPARED

Industry observers agree that most large law firms learned valuable lessons from the economic downturn a decade ago and are better prepared than ever to weather any approaching economic storm.

Ward Bower, principal of legal consulting firm Altman Weil Inc., suggests that the key to being prepared is for a firm to diversify into countercyclical practice areas and to be prepared to downsize where necessary. Also, firms should cross-train lawyers in areas such as corporate law and real estate to handle matters on both sides of the cycle.

Jordak believes this is why larger firms such as his are better able to withstand the vagaries of the economy. "For a firm such as Alston with a broad base, if one area is down, others go up, so it equals out over time."

Even so, some firms are tempted to hunker down in the face of a recession. That can be a mistake, Bower warns, because they may be missing opportunities presented by the recession to expand through lateral hires and mergers. "Firms that are adequately capitalized can find recession to be a growth opportunity."

Also important is for law firms to be flexible in their staffing, advises Jordak. "Firms need to have the flexibility to assign associates from an area that's down to a more active area."

Others suggest trimming may be in order. "Look extra hard at the quality of your lawyers," recommends Donald A. Loft, a partner with Morris, Manning & Martin in Atlanta. "Get lean and market the firm harder. Incentivize your good marketers to get out there."

Citi's DiPietro is even blunter: "Firms are recession resistant, not recession proof. This is an opportunity to shed unproductive lawyers via rigorous performance reviews."

LISTEN TO YOUR CLIENTS

No matter what happens, don't forget your clients, several practitioners urge.

"One thing that's important is for attorneys to really listen to their clients and try to be ahead of the particular concerns in their sector of the economy," says Jordak. "By doing that, you can better position yourself to help your clients work through their recession woes."

Donald Loft agrees, "Get more creative with your fee arrangements. Put extra emphasis on efficiency and service. It is a privilege to represent your clients, not vice versa; act like a business partner and be sensitive to their needs."

While larger firms that are diverse in their practice areas and geography may have the upper hand in weathering a recession, smaller firms have an advantage in their flexibility.

"Smaller firms with flexibility may pick up some clients," says Loft. "I would expect corporations to shop around. I would expect rate increases to slow down and increased demand for fixed price services."

If all this makes you nervous, you are not alone. "Every law firm is always nervous about its work and its clients," observes Zeughauser. "Normal anxiety is heightened at a time like this. There are few firms that don't worry about losing work."

But even if there are storm clouds approaching, there may be a silver lining within them.

"The legal profession is extremely resilient, and the demand for legal services will undoubtedly continue to grow, albeit perhaps at a somewhat slower pace," says the Hildebrant/Citi Client Advisory. "But, with careful and sensitive management and with particular attention to 'people issues,' we believe that most firms will experience a relatively good year, even if overall annual revenue and profit growth is less than in the immediate past."

For Donald Loft, challenging times offer opportunity. "When times get tough, that's when you have to use it as an opportunity to examine how you can compete more effectively. If you do that, it will serve you well not just in hard times, but when things turn around as well."

Editor's Note: This article was originally published in BullsEye, a newsletter distributed by IMS Expert Services.