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Coronavirus impact on the legal sector (one year, and a bit, later)

Author: Leon Hutchinson, Audit Director, PwC

Published: 19 May 2021

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The coronavirus pandemic was a shock to most sectors, and law firms were no different.

The initial business reaction of the legal sector was one of fear about what it will mean for the wider economy and how it will impact upon the financial performance of their firm. More than a year since the start of the first lockdown, how has the legal sector responded to the pandemic? And how should law firms view the future as the UK eases lockdown measures and, hopefully, returns to some kind of normality?

The performance of law firm's through the pandemic to date

Law firms, generally, have proven resilient to past economic pressures and this time appears to have been no different. Two key factors have been noted:

  • The ability to deliver legal services in a remote environment - many law firms have been able to continue to deliver services to their clients, maintaining, or in some cases, exceeding chargeable hours and revenue of the previous year.
  • Response measures - These included office closures (or limited access), delayed partner profit distributions and staff promotion rounds, tightening of discretionary spend, and in some cases limited hours or furloughing of staff. These were early response measures that were made in order to reduce cost and protect profits. A number of firms are now repaying furlough and staff for reduced wages in acknowledgment of their firm's positive financial performance.

We are now entering a new stage of the pandemic, with the UK vaccine rollout proving successful to date and an ongoing easing of lockdown measures. There appears to be a sense of cautious optimism across the legal sector. The full extent of the impact from Brexit and potential variants of the virus are still concerns, but law firms can now be confident that they can deliver a quality experience to clients remotely. This is important, as there is growing acceptance that hybrid working will become the norm.

Staff, both client facing and in support functions, will gradually come back to offices, but there is widespread recognition that there’s a desire amongst the workforce to work from home 2-3 days each week in future. Hence, this means staff being in the office 2-3 days per week.

With this in mind, many firms will be reviewing their office space requirements. Although, this may well be impacted by how far out leases run. Reviewing office requirements does not necessarily mean that there will be reduction in space used; rather, a reorganisation of the existing space to make it more collaborative. The expectation is that office space for law firms will look very different in, say, the next five years to how it looked at the beginning of 2020.

Priorities as we move forward

What priorities should law firms set in the short to medium term? This will very much depend on the market and geographical segments they serve. However, there are certain priority areas that all law firms should focus on, at least to some extent. These include:

  • Improvements in working capital - Improvements in working capital were realised by many firms at the beginning of the pandemic. But cash needs to remain front of mind, with a careful eye on cash flow management and forecasting. There is widespread recognition that improving working capital is a top priority. For example, doing work in January and not being paid until April or May cannot continue to be acceptable.
  • Developing future talent - Talent and people issues existed before the pandemic started and they are not going away. Coupled with this is the lack of face-to-face interaction for new joiners since the start of the pandemic. Firms will want to focus on ensuring these individuals are provided with the right opportunities and environment to develop at the right pace.
  • IT investment - Law firms are expected to improve their IT infrastructure for two main reasons: (1) improved service delivery; and (2) protection against Cyber Risk. The sector should expect to see IT investment in better HR and client management systems, cloud technology and cyber security. Perhaps investment in Artificial Intelligence (‘AI’) tools will start to take off as well.

The above priorities are part of the foundations for the future of a law firm - one that is agile and tech-enabled.

Major economy-shaking events will continue. Law firms that improve their agility will be best placed to respond to whatever challenges come next. Agility will be an important factor in retaining clients too - they’ll expect a digital, responsive experience that’s not burdened by the traditional approach.

*The views expressed are the author’s and not ICAEW