Coronavirus, Election Jitters Have Law Firm Leaders Pondering a Downturn

Stocks slid downward for the seventh day in a row Friday, as fears of the coronavirus grew, and the S&P 500 index’s record high—from just one week ago—is very much in the rear view mirror.

Law firms are also confronting whether their recent gains could be under serious threat if the spreading disease, officially called COVID-19, puts a damper on corporate profits and economic growth, as investors clearly fear.

A report earlier this month from Citi Private Bank showed that demand had increased each quarter of 2019, helping to fuel solid growth across the industry. A prolonged shock to the global economy would undoubtedly hurt not just demand, but would also increase clients’ resistance to increases in billing rates, which the Citi report said had an even greater impact on 2019′s revenue growth of over 5%.

“There’s been a feeling on the part of many chairs and managing partners that the legal market is due for a correction at some point,” said Zeughauser Group consultant Kent Zimmermann. “It’s possible that this may be the beginning of it.”

Well before the start of the coronavirus outbreak in Wuhan, China, in December, a majority of American economists had predicted the U.S. economy would enter a recession by the end of 2021. That’s still a long way off. And the analysts at Citi, even acknowledging the threat of the virus, said earlier in February that they did not anticipate a recession in 2020.

But Chase Simmons, the CEO and chairman of Polsinelli, sees signs already, even ignoring the impact of the disease, that the now nearly 11-year-old economic expansion, the longest in U.S. history, could be coming to an end.

“Everyone always says old age does not kill an expansion or a bull market. But one of the reasons why we’re talking about there’s going to be a recession is it’s been so long,” he said. “We also see our distressed practices were up this year. We had a lot of bankruptcy activity. We had a lot of loan enforcement activity. We saw that click up right at the same time we saw a ton of continued debt lending.”

Visiting law firm leaders in Texas earlier this week, Zimmermann also found seeds for concern. When he arrived, the talk was about a softening energy market causing some firms to revise their 2020 budgets. By the time he left Wednesday, the coronavirus, and the effect it was having on global markets, had become a part of the conversation.

“There’s more questions than answers at this stage,” he said.

Reed Smith global managing partner Sandy Thomas acknowledged that the disease introduces an added level of uncertainty to the firm’s existing preparations for a potential recession.

“The coronavirus exists outside of a natural economic downturn,” he said. “We don’t know yet how it will effect our business but we’re watching it very closely.”

If COVID-19 has been the most closely watched news story of the last week, the progression of the Democratic primary race can’t be far behind. And even with former Vice President Joe Biden favored to win Saturday’s South Carolina primary, Vermont Sen. Bernie Sanders remains the most likely of the candidates in the field to secure a majority of delegates by the end of the contest, according to the website Fivethirtyeight.com.

Even if a brokered convention is even more realistic at the moment, the prospect of a self-described “democratic socialist” landing the nomination is also prompting worries in BigLaw.

“There’s a widely held perception that Bernie Sanders or Elizabeth Warren would be bad for the economy and bad for business,” Zimmermann said. “Chairs have been mentioning that.”

At the same time, changes in presidential administrations, by forcing regulators to pivot their focus and introducing the prospect of new legislation, always introduce new demand for lawyers, as clients scramble to make sense of uncertainty. That would be the case in the event that Sanders secures the nomination and defeats President Donald Trump, just as if it would the case if the far more business-friendly Biden or former New York Mayor Michael Bloomberg prevail in the primary and in November.

“There’s lots of different practice areas that could be impacted by a change in administration,” said Blank Rome managing partner and CEO Grant Palmer.

It’s the more long-run consequences of a Sanders presidency, with steep tax hikes promised for the ultra-wealthy and the potential dismantling of the private health insurance industry, that keep leaders awake at night. Witness the many practice group leaders and chairs that have donated generously to Biden’s campaign, or are pivoting to Michael Bloomberg.

An economic downturn, regardless of the cause, won’t necessarily be a catastrophe across the legal industry. Many firms talk up their capabilities in traditionally counter-cyclical practices, like litigation and bankruptcy. At Reed Smith, Thomas said the firm’s focus on five sectors of the global economy puts it on firm footing.

“We have a hedged firm,” he said. “If you look at our five industries, the capabilities that we have in those five industries are relevant to good times and to times of distress.”

Zimmermann said that he’d heard from people at one firm with a preeminent restructuring practice that is gearing up for added demand, given a global economy that’s softening unexpectedly rapidly as the result of the coronavirus.

And he advises that more firms consider the inevitable downturn, regardless of when it transpires, as an opportunity.

“Many chairs and managing partners could soon have cover to more aggressively cut chronically underperforming people, practices and offices to strengthen the performance of their firms in advance of a softer economy,” he said. “For many law firm leaders, this puts them in a better position to make deeper cuts they’ve wanted to make for some time, but about which they’ve faced internal opposition during a stronger economy.”

The firms that get this right will also be well-positioned to make a run at top talent at firms that have been complacent. And if a major downturn does strike, the losers may at least be able to blame a global epidemic or electoral politics for their trouble.

Additional reporting by Dave Thomas and Lizzy McLellan

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