Law Firm Leadership Series 2022

Pandemic impact on law firms

Pandemic impact on law firms

As law firms sent their partners and staff home in March of 2020, many feared the worst. Would the lockdown bring law firms to a complete stand still and decimate revenues? How would they keep clients happy? Would all firms manage to bounce back? The tension and nerves were palpable across the city as office lights went out and IT departments scrambled for remote working tech.

While these fears were justified, the reality turned out to be less dramatic. As businesses firmly at the heart of the knowledge economy, law firms were able to respond and adapt. In fact, the speed at which firms were able to support staff and partners working remotely was impressive. Clearly, firms that had already invested in the technology to support the shift to remote working had a head start, but none of the firms we interviewed failed to adapt.  All the law firms made the investments that were needed to keep operating and did so successfully in order to continue delivering work for clients.

The firms with head starts had already embarked on digital transformation journeys and embraced remote working. Before the pandemic, these digital trailblazers were going against the grain and the received wisdom that remote working would never work for law firms. In fact, our interviews revealed that these firms proved to be more resilient and adapted quickest.

“We had been using remote working for many years. Our culture was to trust people to be adult about it. When lockdown happened, we switched pretty seamlessly to working from home.”

The crucial factor underpinning this successful shift by law firms was that demand for legal services held up during the lockdowns. In fact, many of the firms we talked to actually struggled to meet demand from clients. The result is that almost all law firms have emerged from the pandemic in sound financial health; many had record breaking years in 2021 and are not expecting things to slow down.

There is no sign of a reduction in demand for legal services. Most of the firms we spoke to expect demand to remain strong and are concerned with finding ways to effectively meet that demand. Overall, the legal sector has done more than survive the pandemic. The extent to which firms saw demand increase during the pandemic varied from firm to firm. Those most exposed to the Private Equity boom did especially well. Some law firms also reported some reduction in this work. But all firms we interviewed reported growth in overall demand, coupled with a reduction in expenses.

The Covid margin?

The evidence from our conversations with law firm leaders is that the extended implementation of social distancing measures had a significant positive impact on the financial health of law firms. In essence, the significant cost of travelling to, entertaining and maintaining relationships with clients was cut to near zero overnight. Whilst in many cases, firms reported chargeable time increasing with fee earners spending time more productively - time that might have previously been used commuting or travelling to client meetings. Some firms were also able to reduce their office costs. The outcome was increased profitability, and this goes a long way to explain the record-breaking revenue experienced by many firms.

Clearly, the “Covid margin” has been reduced as social distancing has been wound down through 2022. The costs of travel and entertaining are increasing again. The question for law firms is whether clients have permanently changed their expectations? Are they now happy to have a video call rather than a face-to-face meeting? Can client relationships and business really be maintained virtually now that it is possible to go back to business as usual? The alternative is a return to more traditional ways of working based on face-to-face contact and meetings and continuing to experiment with optimising hybrid working.

Financial headwinds

We have seen that law firms survived the onset of the pandemic and the introduction of social distancing, with demand from clients for legal services staying strong through 2020 and 2021 and margins improving because of the unexpected side effects of international lockdowns. It seems that firms will need to lean on that built up financial health as serious financial headwinds hit the economy and the legal sector.

It may be too early to tell what the impact of a UK recession will be. Some of our interviewees referred back to previous recessions as having led to strong growth in demand for legal services, albeit in different types of work. We were struck by an overall confidence that, whatever lay ahead, well managed law firms would weather any storms.

The costs of talent

The first issue law firms are tackling is a human one. With its roots in the 2008 global financial crisis, where training contracts were all but removed, there is a shortage of talent. Law firms are struggling to recruit enough associates to meet client demand. There is also a supply issue with not enough people entering the law firm sector, and competition for technology specialists from other industries. In part, this all reflects the upturn in demand as the economy recovers from the pandemic.

The end result is that firms are having to pay substantially more to recruit and, especially, recruiting associates. Many of the law firm leaders we spoke to report paying 25% to 30% more than they would expect to secure candidates. This additional cost is substantial, and could impact profits if not covered by rate increases.

Quite apart from the financial impact of these increased salaries, the shortage of talent is a serious contributing factor changing the cultures and balances of power with law firms. We discuss this in another article in this series.


“I’m old enough to remember the last period of high inflation – we had to increase our charge out rates and our salaries twice a year. When prices are going up fast, you find that your people expect you to protect them from the impact.”

Law firms are not immune to inflation – notwithstanding the specific issues with a talent shortage, and the knock-on impact upon wage expectations. Inflation is starting to drive up law firms’ overheads, and they will need to consider how they respond. Firms will need to consider when and how they pass those costs on to their clients. Clients may not be accustomed to rate cards being updated, let alone updated every six months.

The issue for law firms is how to sustain their current financial health despite the rising costs of talent and other overheads. They will need to have potentially difficult conversations with clients about the impact of inflation and rising costs. The timing and framing of those conversations will go a long way to determining the outcomes.

Law firms will also need to find solutions to the rising cost and other challenges of recruiting and retaining talent. They may have to take a fresh look at what they offer associates beyond financial rewards. Flexible working, training, work/life balance and alternate career pathways will all have a part to play in a motivating benefits package which isn’t centred on money. It will be intriguing to see how the sector responds and what solutions are found. Our learning from our interviews is that understanding the true needs and wants of people is key, whether they are associates or support staff. Finding ways to have open and honest discussions will support that understanding.

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