Technology

The Fate Of Midsize Firms In A Post-Pandemic World

Law firms leaders quickly learned that a willingness to adopt new technologies into their firms was a requirement for survival during the pandemic.

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No matter who you ask, one thing is clear: the pandemic will undoubtedly have long-lasting effects on all aspects of both our personal and professional lives. In the professional realm, businesses, including law firms, have been and will continue to be impacted by the repercussions of social distancing requirements and the work-from-home revolution that followed.

Of course, the effect of the pandemic on the practice of law varied greatly from one firm to the next. Often, the impact was largely dependent on firm size, geographic location(s), practice area(s), and, of course, technology readiness. For example, some firms were already operating in the cloud and were able to quickly pivot to remote functionality and were easily able to communicate with clients and colleagues, accept online signatures and payments, and quickly access documents and law firm data. For other firms, the transition to remote work was a much more difficult one.

Without a doubt, the past year was both unpredictable and unprecedented. The effects of the pandemic dramatically affected the practice of law and because we’re still in the midst of that change, it’s difficult to fully appreciate the overall impact. That’s why I found this year’s Thomson Reuters Institute 2021 Report on the State of the Midsize Legal Market, which was produced in collaboration with the Georgetown Center on Ethics and the Legal Profession, so interesting. It provides a unique snapshot of the legal market and offers useful insight into how midsize law firms have fared in the past year and how the effects of the pandemic will likely impact their operations in the future.

The Shift To Remote Work

Not surprisingly, remote work was one of the first issues addressed in this year’s report. The pandemic ushered in an unforeseen and rapid transition to remote work, and many law firms were wholly unprepared for the reality of running a law practice with a dispersed workforce.

Of course, out of necessity, most midsize law firms adapted and implemented technologies that allowed lawyers and law firm staff to work from home. And, as explained in the report,  the the shift to remote work provided unexpected opportunities to law firms that were willing to embrace the changing times:

One of the most significant changes was the shift to working from home. The transition has major implications going forward for firm overhead costs, productivity, delivery of legal services, and technology investments.
While changes such as these have been dramatic, they can also mean opportunity. This may be especially pertinent for the midsize law firm segment, which has advantages that may enable it to uniquely capitalize on a rapidly changing market.

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Technology Saves The Day

Next, let’s take a look at technology adoption by midsize firms during the pandemic. Not surprisingly, a law firm’s willingness and ability to adopt cloud-based technologies has been a huge determinant of success during the pandemic. Firms that had cloud-based technologies in place that facilitated remote work were able to get back to work during quarantines without skipping a beat. In comparison, firms that were slow to adapt paid the price and spent the much of 2020 playing catch up.

However, when it became clear that the pandemic showed no signs of abating in 2020, the vast majority of midsize law firms ultimately invested in technology. After all, as the report’s authors explained, there was no other feasible option since enabling remote work was the only way to ensure economic viability:

Technology spend increased 4.8% in 2020, up from 3.3% in 2019. Much of that increase was necessitated by remote working needs as firms scrambled to maintain continuity of workflow with a suddenly remote workforce.

In other words, law firms leaders quickly learned that a willingness to adopt new technologies into their firms was a requirement for survival during the pandemic. Out of necessity, law firm leaders prioritized technology spend and soon learned how beneficial cloud-based tools can be. As the authors explained, the increased efficiency, productivity, and flexibility was quickly realized, resulting in plans to spend more on technology in 2021 and beyond:

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(T)he investments in technology are expected to continue or even accelerate this year. The 2020 Law Firm Business Leaders Report from the Thomson Reuters® Institute found that half of firms surveyed plan to increase their use of technology to cut costs. In 2020, much of the law firms’ technology investment was devoted to remote work infrastructure — laptops, cloud-based technologies, web conferencing, VPNs, and other connectivity, etc. With remote infrastructures now largely completed, firms are turning their attention to technologies that can bolster workflow productivity in other ways…such as legal project management, financial management information systems, platform and collaboration tools, document automation, and matter management analytics are among the biggest targets for adoption and upgrades.

The Financial Impact Of The Pandemic

The report also addressed the pandemic’s marked effect on the economy overall and how it impacted the midsize legal market. For midsize firms, 2020 started off strong, but when the pandemic hit, everything came to a halt. Maintaining profitability was a near-impossible feat in the early days of the pandemic, but over time, as firms (and courts) put processes and technology in place to facilitate remote work and increase efficiency, midsize law firms were eventually able to rebound.

According to the report’s authors, this meant that the midsize market actually had a fairly profitable year in 2020:

(A)s the pandemic took hold…demand plunged, driven downwards by the antagonistic effects of reduced demand for corporate work and litigation as businesses shifted their priorities and courthouses closed. Following that sharp initial drop…demand for midsize legal services begin a slow, steady recovery in the second half of the year…(and) (p)rofits-per-equity partner grew by 5.8% in 2020, nearly double the growth rate of 2019.

Of course, it took more than improved workflows and technology to ensure financial stability during the first half of the the pandemic. Firms also had to enact cost-saving measures, which included reducing staff and office space. Those steps helped to offset reductions in income and set the stage for an unexpectedly good year overall for the midsize legal market, as explained by the authors of the report:

While firms held direct expenses in check through slight reductions in associates, of counsel, and non-lawyer timekeepers, even greater reductions were realized in overhead expenses…(T)he move to work from home contributed immediate and major cost savings. Office expenses, which make up about 8% of overhead, fell by 25%. Business development and marketing, and recruiting, 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.

Practice Areas Affected By The Pandemic

Another interesting and notable result of the pandemic was how it affected different practice areas. This impact was of particular import to solo practitioners, small law firms, and boutique firms with a single practice area focus, since a decline in demand for that area of law could be devastating to the firm’s bottom line.

Large and midsize firms, however, handle many different types of law and thus have many different practice groups. Accordingly, a decline in demand for one practice group is balanced out by an increased demand for a different practice group. For that reason, as described in the report, for midsize law firms, demand was lower overall, although some practice areas had higher demand than normal and thus compensated a bit for the lower demand for other types of legal services:

(L)itigation — which typically makes up about one-third of billings — was down 2.9% due to courthouse closings and restrictions when courts did reopen. While corporate work initially slumped as the pandemic took hold, it recovered towards the end of the year…(and) finish(ed) 2020 nearly flat, down only 0.2%…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.

Lessons Learned

There’s no doubt about it: 2020 was a challenging year for law firms big and small. Midsize law firms had their work cut out for them last year, and all signs point to 2021 being a bit of a tumultuous ride as well. Even so, the future looks bright for for the midsize legal market, as long as law firm leaders are willing to continue to adapt and innovate, both in the here and now and beyond.

With that in mind, according to the authors of the report, a resilient and forward-thinking mindset is the key to success for midsize law firms in a post-pandemic world:

(B)y virtue of the position they occupy in the marketplace, many midsize firms possess unique advantages when competing for business. These include value, flexibility, and agility…(But) (c)lient needs are changing, and value and efficiency in delivering legal services are more prized than ever. It’s incumbent upon midsize firms to seize their inherent advantages — a compelling cost-value basis, and greater agility in responding to matters — and more effectively leverage these competitive advantages…To achieve that, they need to apply the lessons learned, and navigate a new way forward rather than counting on a return to business as usual. And, it will require much of the same resilience and innovation that they so successfully demonstrated in dealing with the still on-going challenges that are carrying over from the past year.

The bottom line: we’re going to be entering a “new normal” on the other side of the pandemic and the old school ways of thinking and doing business simply won’t cut it. An innovative mindset is key, and this includes a willingness to: 1) adapt when needed, and 2) invest in cutting edge technologies that will ensure built-in efficiency and flexibility.

Is your firm ready to thrive in the new world order? If not, what steps can you take today to build resiliency into your firm’s processes so that your firm will succeed no matter what the future holds?

Nicole Black is a Rochester, New York attorney and Director of Business and Community Relations at MyCase, web-based law practice management software. She’s been blogging since 2005, has written a weekly column for the Daily Record since 2007, is the author of Cloud Computing for Lawyers, co-authors Social Media for Lawyers: the Next Frontier, and co-authors Criminal Law in New York. She’s easily distracted by the potential of bright and shiny tech gadgets, along with good food and wine. You can follow her on Twitter at @nikiblack and she can be reached at [email protected].

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