How Mid-sized firms turned a profit in 2020 despite the challenge of a Pandemic
The pandemic habits of mid-sized firms in America may be of particular interest to Nigerian firms because most of our “Big” firms fit the mid-sized firm archetype by international metrics. Mid-sized firms have been recognised for showing resilience and ingenuity during a period that many predicted would spell disaster for firms of this size.
Predictably at the dawn of the pandemic, the demand for Law firms’ services fell, and court activity slowed significantly. According to a recent report from Clio, the number of legal matters opened each week from surveyed firms has declined over 30% since the start of the year. The report also revealed that 56% of law firms saw a significant decrease in requests for legal assistance. According to Jeff Grossman, head of business development at Citi Private Bank Law Firm Group, “one in five firms said demand for their services dropped 20% or more in April.”
Despite these challenges, American firms saw overall revenue growth, with Profits-per-equity-partner rising by an almost 50% margin to 5.8% in 2020. They achieved this primarily through higher rates and strategic investment.
Mid-sized law firms increased their rates to offset the lower demand for legal services. According to a report by Thomson Reuters, mid-size worked rate growth had been fixed between 2.5% and 3.3% for three years pre-pandemic, but in the last nine months of 2020, mid-sized firms rates grew by 3.9%.
Notably, even though midsized firms registered a record increase in rates, the pricing gap compared to the larger firms increased because larger firms increased their rates faster. The synchronised adjustment from mid-sized and large as a whole is probably what has seen the market maintain stability and mutual revenue profit.
Data from Thomson Reuters Acritas finds that mid-size firms are more frequently recognised for their value and pricing than larger firms. By being less aggressive in raising rates compared to larger firms, mid-size firms are putting themselves in a position to provide a superior cost-value proposition. As businesses move towards a post-pandemic world with more reserved budgets, their emphasis on assigning work with price and value as a factor is likely to increase.
Expenses & Investments
While many law firms downsized through slight reductions in associate-level staff and non-legal staff, the greatest expense reductions were realised through overhead expenses.
Office expenses typically make up around 8% of overhead costs, and in a pandemic that forced lawyers to work remotely, this cost fell by 25%. Business development, marketing and recruiting were also cut by around 40%. More cost savings, including the near non-existence of travel, contributed to profitability growth even with the diminished demand for law firm services.
Concurrently, firms started to make strategic investments to position themselves for better long terms success. There was an increased investment in technology from midsized firms, which saw a 4.8% investment growth in 2020 from 3.3% in 2019. The bulk of this increase was to facilitate the acquisition of remote work infrastructure — laptops, cloud-based technologies, web conferencing, VPNs, and other connectivity software solutions as firms needed to maintain workflow and productivity with the abrupt reality of a remote workforce.
These investments in technology are expected to continue to grow in 2021. The 2020 Law Firm Business Leaders Report from the Thomson Reuters Institute found that half of the firms surveyed plan to increase their use of technology to cut costs. Some of the area being closely watched are advanced technologies such as artificial intelligence, blockchain and smart contracts to boost efficiency.