The past several years defied expectations for the legal industry, as the pandemic unfolded and 18 months of unexpected prosperity followed.
Next year is likely to tell a different story. As we head into 2023 amid the early stages of economic slowdown, it is no surprise the industry is again preparing for the worst while hoping for the best.
The industry is well-prepared for challenges ahead. Its leaders will be relatively cautious, but the best-run law firms and law departments will continue to invest in the future and prioritize development and retention of the talent they have worked so hard to recruit.
A recession of some sort has started in the legal industry and is likely to continue for some time. The good news is that law firm profits will likely remain steady across the board. Any market contractions are likely to be more geographically narrow than before.
In particular, Silicon Valley and New York City are seeing the impact of decreasing legal demand and historical growth from previous boom years. Tackling those challenges is never easy, but the impact on firms and law departments won’t be as great as the 2008-2009 recession, even where tech and capital markets play a large role.
Additionally, legal market activity and growth in regions such as Texas and Florida have been very robust this past year, and that trend will likely persist. However, even in these more robust growth markets, the rate of expansion of new office openings is likely to decline from the pace of the previous two years.
Litigation and regulatory practices, and to a lesser extent real estate, will continue to grow nationally. The combination of focused regional growth, specific practice area growth, and narrowly focused geographic downturns will likely cancel each other out and cause the industry and law firm profits to remain relatively flat.
In this environment, law firm leaders should prioritize long-term strategy and growth, even as firms and legal departments try to mitigate the impact of slowdowns. Law firms are already much better run today than they were during the last recession.
The best firms seem less likely to let short-term profits drive long-term decisions. Investment in training, development, and talent mentoring is critical as they learn to adapt to a new normal created by the pandemic, the economy, and remote work.
Return-to-office mandates and work from home policies remain hot topics in the legal field. While companies and firms have more leverage with employees than before, the looming threat of returning to the office full time is more smoke than fire for most law firms.
Many firms are trying to take a harder line, ostensibly for the benefit of culture and development, but we see little evidence firms are meaningfully enforcing these directives. If firms overplay their leverage with associates, the attorneys may seek more flexible work opportunities when given the chance.
Talent retention should remain at the forefront of the minds of leaders. That starts with cultivating a strong workplace culture and supportive environment—five days a week in the office is likely a thing of the past.
Attorneys will more commonly split time between home and the office, with some working fully remote permanently. Talented attorneys will still find ways to hone their skills and seek learning opportunities regardless of where they work.
For example, global law firms have been running distributed teams for years as clients leverage the best lawyers in a firm regardless of location. Transcending geographic location is built into the structure and business model of law firms, and helps explain why they were so quickly able to overcome lockdowns and pandemic restrictions compared to other industries.
Remembering the long-term impact of deep layoffs from 2008, most firm leaders would admit those cuts impacted firms’ ability to respond when the economy recovered.
It takes years to attract and train associates, and turning on a dime when clients return is not a realistic business strategy. Ultimately, the best firms do not allow short-term profit concerns to dictate long-term human capital strategies.
The same approach applies to partners as they manage their careers. Partners continue to move laterally during even the deepest recessions.
During tougher times, partners who consider a move typically seek out quality and stability. Therefore, strong firm management and brand protection is perhaps even more important during a recession.
Similarly, general counsel and other in-house leaders must brace for some cutbacks in numbers and increase in workload per person.
Despite an economic slowdown, GC hiring overall is likely to remain strong as companies rely on their top in-house leaders for a variety of skillsets and expertise. These skills extend beyond just the legal function, and are often more important during recessionary periods.
The legal industry achieved record-setting profits in 2020 and 2021. While the near-term outlook is not dire, this string of record growth and profitability is unlikely to continue in 2023.
However, there is still significant opportunity for law firm leaders to apply lessons from the last recession and the pandemic, and make necessary investments to position their firms and lawyers for long-term success. The firms and companies that look to thrive during the changing environment will continue to outpace their peers in 2024 and beyond.