This1 is in large part due to the strong start to 2020, the way firms adapted so quickly and effectively to a fully remote working environment, and the robust performance of certain practice areas. This latter factor is an important feature of the legal industry—even during economic downturns, businesses still need legal advice.
While the final results in 2020 might not match the performance recorded over the last few years, law firms’ finances have certainly been helped by growth in bankruptcy and financial restructuring, litigation, and finance and capital markets activity. At the time of writing, the industry is on track to end 2020 with mid-single digit revenue growth and reduced expenses.
As a result, projected net income and profit per equity partner (PPEP) could be in the mid-to-high single digits. Behind the industry averages, we see wide dispersion2 with the market favoring the largest and most profitable firms. That said, within any market segment, we see firms outperform—largely due to their brand and practice mix, with more than a few firms projecting record profits.
Looking ahead to 2021, we envisage the market will reward firms that not only have strong differentiated brands, but also have a diverse practice and industry mix. Growth is more likely to come from the US and UK than from other markets, although some firms are expecting demand growth among their Asian, European and Canadian practices.
Unlike the trend seen in recent years, firms view litigation and bankruptcy and financial restructuring as primary drivers of growth continuing on from 2020. There is mixed sentiment about the expected level of mergers and acquisitions (M&A) activity. But positive momentum seen in M&A, particularly relating to private equity during the second half of this year, is tilting the outlook toward a more positive picture than previously anticipated.
And reflecting the bifurcation in economic performance we have seen at the macro level, we would expect to see growth in demand for legal services coming especially from the technology, life sciences, healthcare, and financial services industries.
Having witnessed a successful transition to remote working, the COVID-19 pandemic has also accelerated a number of trends related to greater operational efficiency already evident in the industry. While we do not think this heralds the beginning of an entirely remote legal industry, we expect that some measure of remote working will become a permanent feature of the law firm of the future.
This creates opportunities for greater operational efficiency—including rethinking office space and configuration, and the appropriate level and composition of professional support leverage. We also expect there to be a continued focus on billing and collections, given the direct positive impact this has had on revenue this year.
It also raises questions around how to develop new business and train associates. The longer the COVID-19 pandemic impacts market activity, the greater the likelihood that firms will examine their lawyer headcount and leverage. And with the increasing dispersion in law firm performance, we anticipate lateral poaching to continue, if not accelerate, driving firms to examine how they compensate partners. We also expect more consolidation through mergers between firms of a similar size and acquisitions of smaller firms.
Looking forward, given that law firms tend to fare better than other industries in a challenging economic environment, we remain optimistic about 2021. We expect that the market will favor firms with a strong brand who stay close to their clients and have the right practice mix. While these factors will drive topline growth, we also expect that firms who capitalize on the success of this great experiment in remote working to accelerate further adoption of operational efficiencies, will be rewarded.
Our more detailed findings and projections are presented in this advisory report, and we hope that you will find it to be informative. As ever, we look forward to your feedback.