On March 17th, six counties in the San Francisco Bay Area enacted stay-at-home orders in response to the spread of COVID-19. All non-essential business were to move to remote operations or temporarily shut down. In fits and starts, the rest of the nation followed suit, until, by April, 29 percent of all U.S. economic output was shut down, according to an estimate by Moody’s Analytics.
Today, 149 days since the first shelter-in-place orders went into effect, the crises created by the coronavirus pandemic continue to play out. In addition to the mounting death toll, the economic impacts have been widespread and severe: a decline in GDP greater than that seen during the Great Depression, job losses totaling up to 40 million, and an unemployment rate currently at 10 percent.
How have these dual health and economic crises impacted the legal market, and particularly legal spending by corporate clients? Surprisingly, initial reductions in legal spend have not been as significant as one might expect, according to new research by ALM Intelligence and the Wicker Park Group. Despite the uncertainty and economic turbulence caused by the pandemic, corporate legal budgets have survived mostly unscathed, with more than half of legal departments saying they expect no decline in their budget—and 16 percent even predict an increase.
The international health crisis spawned by the emergence of COVID 19 has largely upended both the way people conduct business, the economic outlook, and the challenges facing in-house legal teams. In the first quarter of 2020 alone, US GDP declined by 5 percent, following years of steady growth.
In the best of times, a 5 percent decline is a major setback. But the full impact of the pandemic wasn’t apparent until the numbers for the second quarter of the year came in, just last week. During Q2 2020, GDP dropped by a stunning 32.9 percent.
However, that decline has not been spread out evenly. In the legal industry, the greatest impacts seem to have been felt early on. Seventy-five percent of BigLaw firms, as tracked by Above the Law and Wolters Kluwer, cut salaries—often graduated cuts, with those at the top taking the biggest hit, by percentage. Thirty-one percent of tracked firms furloughed employees, and just 21 percent enacted layoffs—including so-called “stealth” layoffs that happen unannounced.
In total, the legal industry shed 64,000 jobs by April, according to the Bureau of Labor Statistics. That is a 4.4 percent decline in legal sector employment year over year, but far below the nearly 15 percent unemployment rate in the economy at large during the same period. Since then, legal jobs have slowly begun returning, with a current unemployment rate of 2.8 percent.
Overall, the economic downturn appears to have spared the legal industry. Legal professionals currently face the lowest unemployment rate of any occupation, according to the latest BLS numbers. Those numbers still represent a 250 percent increase in the unemployment rate since July 2019. Still, they are far below the nationwide average—and even well below the 7.6 percent unemployment rate among skilled professionals overall.
Corporate legal departments, too, seem to have evaded some of the worst economic impacts of the pandemic. Of course, the severity of the economic impact on any in-house legal team will largely depend on the organization and industry in which they operate. And certain industries have been hit harder than others.
But, at least anecdotally, we don’t seem to be seeing in-house legal teams facing major cuts in most industries. (This is likely a testament to how lean such teams were already running, with corporate legal facing years of pressure to cut costs, in-house work, and do more with less.)
The numbers from the recent ALM/Wicker Park Group survey on the impact of COVID-19 on corporate legal departments seem to back that up. That report gathered together responses from 130 in-house counsel, most of whom were bullish on their future resources.
Nearly three-quarters of respondents expected their legal budgets to remain the same (57%) or grow (16%) in the days ahead. Only 28 percent were expecting their budgets to decline.
However, where that budget will go is another question. While more than half of respondents expect their budgets to remain steady, less than a third, or just 32 percent, predict minimal change in how they manage work. The other 68 percent, we can assume, are looking for better ways to get things done—ideally at a lower cost.
Indeed, 28 percent say that they are already taking more work in-house as a result of the economic downturn.
That corporate legal departments are largely protecting their budget but increasingly bringing work in-house shouldn’t be a surprise.
Among the corporate legal teams we have spoken to, it’s not uncommon to see headcount remain consistent over the past months—that is, many in-house legal teams have managed to avoid layoffs—while personnel and resources are diverted into reigning in outside spend.
In-housing more work is often one of the main strategies for achieving that goal. In the recent Altman Weil 2020 Law Firms in Transition report, law firms ranked in-house legal teams as their most significant source of nontraditional competition and two-thirds of large firms report that they have lost business to corporate insourcing.
Indeed, in-housing commodifiable legal work like eDiscovery can be an incredibly effective way to control spend. Even when the bulk of the eDiscovery process cannot be handled internally, whether due to lack of bandwidth or the sensitivity of a matter, partial in-housing can still help teams dramatically cut costs. As a quick ROI calculation can show, selecting a preferred discovery platform, processing and deduplicating data in-house (it sounds fancy, but it’s just dragging and dropping files into the software), or conducting basic early case assessment can yield significant savings. Tools that are intuitive, collaborative, and powerfully simple make the change even easier to manage.
What can law firms do to help keep their clients—and keep them happy—during this period? The key is being proactive and thinking creatively, according to survey respondents. By working with clients to eliminate unnecessary costs, outside counsel can truly show their value add—and given the pressures facing corporate legal teams today, demonstrating your value has never been more important.