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Midsize law firm profitability in 2021 likely to look different from last year

Barb McGivern  General Manager / Midsize Law Firm segment / Thomson Reuters

· 5 minute read

Barb McGivern  General Manager / Midsize Law Firm segment / Thomson Reuters

· 5 minute read

Midsize law firms that spent 2020 reacting to the pandemic, now need to seize upon the opportunities that an economic re-opening may offer

You’ve likely already seen some coverage of the recent 2021 Report on the State of the Midsize Legal Market and some of the potential opportunities that currently exist for midsize law firms in 2021.

Now, we have the advantage of being able to consider the financial results for the first quarter of 2021, and they point to a very timely conclusion: the market continues to shift rapidly, and those law firms that wait to address these shifts risk missing out.

As discussed in the Midsize Legal Market report, midsize law firms spent a large portion of 2020 reacting to the pandemic, and understandably so. The report likens 2020 to a play in three acts: the first act opens 2020 strongly; the second navigates the depths of the pandemic’s challenges; and the third brought a slow and steady recovery through the latter part of the year.

The results from the first quarter of 2021 show that the third act not only continues, but that the first quarter served as a crescendo of a sort. For midsize law firms, corporate practices posted strong performance; and this is noteworthy given the general sense through much of 2020 that corporate work, and M&A in particular, would face strong headwinds coming out of the pandemic. And though not specifically discussed in the Q1 report, I can share with you that several key practice areas — including litigation, bankruptcy, and tax work — all improved their performance in Q1 compared to preceding quarters, with particularly strong showings in March.

I share all of this to highlight one of the key takeaways from the Midsize Legal Market report — the changes sparked by 2020 can mean great opportunity for those midsize law firms that can take advantage of their own agility.

As I wrote in one of my previous posts: “Massive shifts in expenses, investments, and headcount, coupled with resilient rates, created short-term cash that shored up law firm profits” last year. That same strategy is unlikely to be as successful this year.

We’ve already seen signs of law firms starting to grow attorney headcount again. For midsize law firms in particular, this is likely a necessary step, as the confounding facts of a lack of leverage and challenges in succession planning due to partner-heavy staffing have not abated. At the same time, firms are exploring what to do with their real estate portfolios, how to balance the desire expressed by many attorneys to continue the benefits they’ve experienced during remote working with the advantages to the firm of having people in the office, and how to strategically respond to the likelihood of increased pricing pressure from clients.

All of these factors will make it difficult to repeat the lucrative results many firms ultimately experienced in 2020, particularly if those firms wish to stick to their 2020 strategies.

Each of the factors I just mentioned will bring with them increasing pressure on the 2020 profit model. Expenses will grow, and rates will likely be under pressure. At the same time, demand for law firm services is growing, and some of the investments made in 2020, particularly with regard to technology, are proving popular with clients.

In a recent interview, Michael Gerlach from RSM US opined, “without challenging how firms operate, their top lines will begin to slow, and expenses will creep back to pre-pandemic levels.” Gerlach also noted that “risks to firm profitability fall solely on the shoulders of the attorneys who continue to be given the same training, tools, and resources the attorneys before them were given.”

He goes on to talk about the new types of thinking that are pushing law firms to address technology questions. These are critically important conversation for law firms to have. The specific solutions that address any given law firm’s needs will, of course, vary. Firms may want to explore different solutions based on whether they want to save costs, improve efficiency, or optimize matter management. But the time to have those discussions is now.

The results from 2020 show that midsize law firms successfully met the challenges brought on by the onset of the pandemic, evidenced by their increasing profits for the year. But the financial insights evident so far this year demonstrate that 2021 is shaping up to be a very different year, indeed.

Last year demonstrated that midsize law firms are capable of successfully responding to seismic shifts in the market. Now, it’s incumbent on law firm leaders to take the agility exercised last year and apply it to today’s reality.

Firms that either hesitate or look to last year for successful strategies risk being left behind.

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