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Law firms are in a fine position, according to legal industry analysts who point to surging demand in 2018 and predict similar outcomes in 2019. But those who take a wider perspective on economic trends are expressing growing concerns.

Half of the economists polled in recent days by the Wall Street Journal predict a recession will start in 2020, and 10 percent see one beginning next year. CFOs in the United States have a more dire outlook, according to a recent report from Duke University. More than half believe that the nation’s economy will be in recession by the end of 2019, and 82 percent believe that a recession will have begun by the end of 2020.

“The end is near for the near-decade-long burst of global economic growth,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. “The U.S. outlook has declined, and moreover the outlook is even worse in many other parts of the world, which will lead to softer demand for U.S. goods.”

So what gives? Are law firms immune to the pressures facing the wider economy? Have they properly absorbed lessons from the past? Or do the rosy reports paper over some fundamental troubles on the horizon?

James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, is in the middle of preparing his own report. He’s not ready to pop the champagne.

Demand is up. That’s good news, but it’s not up dramatically. Productivity is up. That’s very good news. This may be the first time since 2011 that we’ve seen an increase in productivity. Many firms have been able to raise their rates,” he said. “I think the troubling information, however, is that that does not represent broad performance across the market.”

Jones suggests that a superficial look at the aggregated law firm financial data overlooks a growing segmentation in the marketplace between the top-performing firms and all the rest.

“I think the firms at the top have plainly benefited from the past couple of years, from increased merger opportunities and financings,” he said. “They’ve benefited in a way from the Trump bump.”

Consultants Bruce MacEwen and Janet Stanton of Adam Smith Esq. share Jones’ perspective on the emerging chasm between the law firm “haves” and “have nots.” And while they say that most law firms operate on a very short-term perspective, obviating the prospect of recession planning, the 5 to 10 percent that are pulling away from the rest are better run as businesses.

“They will make whatever hard choices need to be made,” MacEwen said.

Even still, and in spite of the established fact that economic expansions can’t go on forever, they’ve only heard about two firms that are actively discussing preparations for a recession. Both firms have COOs with a business and finance background, not a J,D. Just as important,  they are “treated like adults and listened to,” according to MacEwen.

The number that are seriously considering the issues is surely greater than two. But MacEwen and Stanton’s theory is bolstered by the example of Angela Hickey, the CEO at 60-attorney Chicago firm Levenfeld Pearlstein. Hickey holds an MBA, not a J.D., and she pointed to the adage “a crisis is a terrible opportunity to waste” in explaining how the firm has been applying lessons from the 2008 recession to lay the groundwork for the next one.

That’s meant reorienting client service by targeting efficiency and value, but ruling out competing on cost alone. It’s also included a focus on transparency: keeping personnel at all levels informed and bringing in financial advisers to work with attorneys, including younger ones who were not a part of the last recession.

We do a lot to educate our people,” Hickey said. 

The firm’s compensation system is oriented toward economic fluctuations, with base levels lower than competitors and bonuses higher.

“We tell attorneys and staff: When the tide is high, we share across the board. When the tide is lower, we don’t want to hurt our overall talent level,” she explained, adding that the firm is not afraid to part ways with unproductive partners in times of crisis.

Hickey says the firm is expecting a flat year in 2019, an assessment based on reports on the wider economy, such as the Duke survey, and, even more so, from clients’ perspectives.

“That tends to be more accurate for us,” she said.

Those clients are trying to “get things done” in the coming year, in preparation for the uncertainty that awaits.

Robert Tannous, managing partner of Ohio midsized firm Porter Wright Morris & Arthur, hasn’t finalized the firm’s budgeting for 2019, but he’s also being cautious, even after an “extremely” busy 2018 that’s seen a ramp-up in hiring. He noted the layoffs at General Motors, including the closure of an Ohio plant that employs 1,400 auto workers, as a sign that gives him pause, even amid a fair amount of demand.

“You have to be cognizant of a potential downturn,” he said. “We haven’t fully run it through yet, but I think the common feeling is that we need to be conservative in how we budget and how we’re managing our business.”

One concern is that the formula that worked for many firms in the previous recession—”circling the wagons very quickly to protect profits per partner,” as Jones puts it—might not be in play this time around. After the Great Recession, the solution was to lay off staff and associates and dramatically cut back on the number of equity partners.

Now, he said, “firms have done such a good job in managing expenses in the last couple of years that there ‘s not a whole lot left to cut.”

Breaking It Down

Not all recessions are the same, and the shape of a downturn will likely be dictated by the factors that brought it forth.

Among the economists who responded to the Wall Street Journal survey, the trade war between the U.S. and China was deemed the biggest threat to the U.S. economy in 2019 by 47.3 percent of respondents.

If trade tensions continue to increase, a number of elite law firms that handle lucrative cross-border work could experience a reversal of fortunes. While international trade practices have been booming as a result of the uncertainty introduced by growing tariffs, along with sanctions, if tensions continue, clients will likely scale back their global ambitions, and the demand curve will invert.

If the U.S. is seen as some kind of pariah on the world stage, there’s going to be less of that,” Stanton said. 

Firms focused heavily on mergers and acquisitions may also be at increased risk. Cross-border deals have already been slowing, and the rising interest rates that are a likely part of any recession could knock an increasing number of potential deals off the table because of the cost of debt.

That could be bad news for firms that have bulked up their corporate side in recent years. Conversely, litigation titans are likely to be in a better place. While that area had been lagging behind transactional work in recent years, Citi Private Bank’s recent report identified more balanced growth in 2018.

Report co-author Gretta Rusanow, an analyst with Citi’s Law Firm Group, pointed to a recent trend of “right-sizing,” or eliminating overcapacity in litigation.

Firms that have adequately responded to the decline in “discretionary litigation”—avoidable court battles over contracts and other disputes—may have put themselves in a position to profit from nondiscretionary litigation that’s not going to vanish, regardless of where the Dow Jones Industrial Average or the unemployment rate stands.

MacEwen turned to the headlines for one especially topical example, albeit involving a client that many firms might wish to avoid: “If you’re Michael Cohen, it doesn’t matter if there’s a recession or not. You need high-priced lawyers.”

Read More: 

Demand for Big Law Hits Post-Recession High: Report

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What Law Firms Need to Know to Prepare for the Next Recession