U.S. law firms have largely succeeded—so far—in weathering a financial storm, even as the country has been battered by the COVID-19 pandemic, according to survey results released Tuesday by Wells Fargo Private Bank.

Although demand has dipped as a result of pressure on the wider economy, a strong first quarter had put firms on solid footing. Furthermore, collections are still up by 3% through May, while expenses have largely been flat. That translates to an increase income for law firm equity partners.

"Through the five-month period, the industry has fared pretty well," said Joe Mendola, senior director of sales for Wells Fargo Private Bank Legal Specialty Group.

Wells Fargo surveyed 72 firms at the end of May, 52 in the Am Law 100 and the balance either Am Law 200 or regional firms.

On the aggregate, demand was only down by 1.4% since the start of the year. But looking at May alone, the impact of the pandemic is clear: demand has dropped by 10.4%, compared to May 2019. While May demand dipped by 6.4% from April, it's important to note there were also two fewer billing days in the latter month. Still, the economy is not expected to recover immediately either.

"There's no doubt that the crisis is affecting demand," Mendola said. "That will be felt increasingly so over the next couple of months."

And there are ominous signs surrounding collections, too. Inventory was up by 7% at the end of May compared to the same period in 2019. That figure, combined with the 1.4% slide in demand, suggests that the pace of collections is slowing. Clients are clearly looking to manage their cash more carefully, according to Mendola.

But he also flagged the relatively modest cuts to staffing as a heartening sign, particularly when compared to the scalpel that firm leaders wielded in the Great Recession. The number of associates employed dipped by just 0.9%. Non-legal staff positions dropped by 4.1%, but Mendola said that his conversations suggested the bulk of these cuts were in roles that did not lend themselves to remote work.

"That's a little bit of a difference from past economic downturns. Firms have not reacted with large cuts overall. It could very well be that expectation that there will be a pick up in the latter part of the year from pent-up demand," he said. 

Mendola added that judicious cuts to partner distributions have also put firms in a position of comfort. Over 50% of firms surveyed elected to delay or reduce these payments. This was likely aided by the timing of the crisis. When the severity of the dislocations from the pandemic revealed itself in the middle of March, most final distributions from 2019 had not yet been paid. And the higher-than-anticipated demand early in the year also helped firms accumulate more cash than they likely had in their projections.

As a consequence, 90% of the firms in the survey show three months or more coverage of monthly expenses excluding partner draws.

Cuts to discretionary expenses like travel and entertainment, partner retreats, marketing, recruiting and training are also making a significant difference for savings.

"It's certainly more than law firm leadership expected," Mendola said. "That's been beneficial."

The impact of the pandemic on a practice by practice basis is less surprising. Transactional practices have suffered, while bankruptcy, labor and employment, and banking work has boomed.

I don't think this crisis is going to impact all firms equally, and it really depends on where firms may have some of their larger concentrations," Mendola said. 

|

Read More

Growth Slowed for New York's Elite Law Firms Even Before the Pandemic Hit