Is it really here? After 128 months of economic expansion, over more than a decade, the end of growth (for now) might just be coming to an end.
It might a little too early to call it – given the retrospective nature of recession – but it certainly feels like we could be temporarily undone by Coronavirus. The worldwide outbreak of COVID-19 and the steps taken to reduce its impact are seriously effecting the world’s economy. One just needs to take a peak at the global equity markets to see for themselves…
This downturn, if we are in fact entering one, will be novel to address as it involves a ‘supply shock’ – a reduction in the economy’s capacity to make things. As opposed to a ‘demand shock’ – a drop in demand that can be addressed by usual government tools through fiscal policy.
So, what is the potential impact for BigLaw?
(1) There could be layoffs…
The last recession was a terrible time for BigLaw, with an estimated 10,000 lawyers in BigLaw (as well as thousands of staff) losing their jobs. The layoffs were brutal. On one day specifically, a day now dubbed as ‘Black Thursday’, almost 1000 lawyers and staff were left jobless.
If we do enter a recession, it could bring layoffs too, but it’s unlikely they’ll be even near the numbers of the Great Recession. Firms have been running fairly lean since the last downturn, preferring to overwork their associates and run lean on office staff, so the impact has already been mitigated. With much less fat to cut, employment should be much safer.
Conducting layoffs during an economic boom, sending staffers packing as partner profits hit record highs, struck some as harsh and unnecessary. But it will probably mean fewer layoffs during the recession than we would have had otherwise — you can’t cut more once you’ve reached bone.
(2) There could be firm collapses…
In the last recession, we saw the deconstruction of a number of BigLaw firms, pulled apart by the economy. Think Heller, Thelen, Thacher Proffitt & Wood LLP, and Dewey.
But, firms have learnt a lot from the last episode. Since the last Great Recession, firms have been seeking greater capital contributions from their partner, reducing reliance on outside credit. They have also cut back on lavish guarantees to lateral partners. In short, they leak much less unnecessary cash than in the past an have much more robust finances.
Yes, there could be some firms who close their doors, but nothing like what we have seen in the past. In fact, the firms that do close for business probably would have anyway.
(3) There will be increased activity in some practice areas…
The obvious counter cycle to downturn is litigation and bankruptcy practice increases. But it’s unlikely they’ll have the increased activity one may expect.
Litigation is becoming a less popular dispute resolution due to its high costs and slow processes. Litigation and bankruptcy may get a little boost from the extra activity, but it’s unlikely that it’s going to spike as rapidly as one may expect.
So what’s the bottom line? There may be a downturn on the horizon, but it is certainly no cause for panic. Firms are far more prepared than last time, and the general state of the economy does not reflect that of the global financial crisis.
Absent of some unforeseen event, this should be more of a speed bump than a cliff.