Planning for the Rebound

We’ve been here before.  Not in the same way of course; the magnitude and length of the disruption caused by the coronavirus pandemic on the economy and the law markets will not be known for some time.  However, although a pandemic is a new challenge, severe market disruptions are not.   Law firm leaders can draw on lessons from the past to think about how to steer their firms through the short-term disruption they are facing, and, of equal importance, to think about how to plan for the medium term.  Law firms should be thinking now about planning for how to rebound from the immediate hit to revenue, keep staff employed and engaged, and respond to the changing conditions their clients are facing.When the SARS crisis hit Asia, one of the most difficult effects of the crisis was the delayed impact on corporate and finance work that lasted many months after the immediate danger of the disease had passed.  With travel and client contact significantly curtailed during the outbreak, the pipeline for deals was largely empty for several months after things got back to “normal” and this caused a significant crimp in the revenues of many law firms in the region.  The shorter-term dip in revenue was compounded post-crisis by the length of time it took firms (and their clients) to rebound from the hit.  The 2008 financial crisis was obviously a higher order of magnitude than SARS, but the same effect can be seen in the reported revenue and headcount numbers of law firms for the years up to, and for several years after, the crisis.A quick survey of the revenue and headcount figures from major firms before and after the 2008 financial crisis shows that many firms experienced a similar, if not surprising, pattern of growth and decline.  Of course, every firm is different and some firms suffered smaller declines and had quicker recoveries, but a common pattern among many firms is that revenue and headcount growth was steady up to 2008, declined sharply over one or two years, recovered somewhat and then stalled for a period of time.  In sum, the shape of the curve looked like this: steady growth interrupted by a crisis-induced sharp drop, followed by a small recovery that then stalls for a year or more, sometimes resulting in a revenue and headcount “plateau” for a few years before revenues begin to pick up again.  A firm that has a “successful” recovery will spend far less time in the plateau phase or avoid it altogether.  In other words, a successful rebound from the immediate impact of the crisis will be driven by a firm’s actions that keep the duration and decline of the plateau to a minimum.  Besides the obvious revenue and profit benefits of avoiding a plateau or at least moving off it quickly, firms that can achieve this will be able to retain legal staff, recruit new partners, and otherwise be able to invest in the firm.  Firms that can do this and grow their client base will come out the other end stronger than before.For many firms, the plateau phase is characterized by the knock-on effect that a recession has on corporate and finance practices.  Some parts of these practices can be quite busy in an economic downturn, but, in general, transactional departments struggle along with a weak economy.  Litigation, on the other hand, can be quite recession resistant and possibly even better than that if the aftershock of a crisis throws up significant amounts of large-scale disputes.  However, many litigation clients will be facing a cash-squeeze which will reduce their capacity to pay for litigation, even for good cases which otherwise represent valuable assets to the client.  So, on the one hand, clients will have good cases but might be reluctant (or unable) to fund the pursuit of the claim.  On the other hand, law firms are also facing financial headwinds that will make it tough to accept significant discounts or fixed fees as an answer to the client’s problem.  However, with every problem comes opportunity and one way to plan for a better rebound, would be to capitalize on this situation.Law firm challenges in many ways reflect the challenges their clients are facing.  Clients want to monetize potentially valuable litigation claims, but they may not have the cash to pay for the legal fees and other costs necessary to do so.  Law firms want to build and sustain client relationships while also keeping the lights on and the staff paid and hopefully realizing a healthy profit too.   A contingent fee arrangement (in the UK, a damages-based agreement or DBA) where the firm enters into a no win/no fee engagement with the client for a percentage of the recovery, will solve the client’s cashflow problem.  In addition, the upside potential to the law firm in terms of significant revenue boosts in the medium-term is very attractive when planning for a quicker, sharper recovery but it might appear to be a high risk option for the law firm in which a loss could leave a large revenue hole on the balance sheet.  However, these days a law firm does not need to take all this risk onto its balance sheet.  Using insurance and/or third-party capital can dramatically reduce the risk while retaining much of the upside.  By co-investing with their clients in litigation, law firms can solve an urgent client problem while also building for a quicker rebound from the crisis.  With risk mitigation and cashflow support from the right litigation finance partner, firms can achieve all this while dramatically limiting the economic downside to such a strategy.Besides the financial boost to the clients and firm, there are several additional benefits to offering contingent fee arrangements to clients.  Notwithstanding the cultural baggage that some firms attach to contingent fees, offering the client a contingent fee structure sends a much stronger and more positive message than, say, a significant discount or fixed fee can.  A contingent fee is a co-investment with a client, demonstrating the firm’s conviction in the client’s claim and aligning the party’s interests in the outcome.  It reflects a long-term approach to a client relationship and addresses the long-standing client mantra that they want an innovative approach to billing that shares the risk.  Discounted rates and aggressive fixed fees both down-sell the value that the firm provides and have a habit of becoming permanent once a crisis has passed.  Not so with contingent fees, they provide an advantageous solution for both parties that avoids these problems.A well-known maxim is to never let a crisis go to waste.  Leaving aside the mercenary connotation of the phrase, firms should look at the crisis as providing an opportunity to try something different when planning for a successful rebound.  Firms should take advantage of the shock caused by the crisis and the resulting short-term damage-control measures to try out new approaches that might have faced resistance in “normal” times.  Contingent fee co-investment, particularly when managed with the tools of litigation finance such as insurance and external capital, can be the means by which firms can maximize the client support opportunity that the crisis is highlighting.  Carefully managed co-investment will give firms the competitive advantage they need to support their clients and achieve a faster rebound from the crisis.