Law firms are avoiding making widespread layoffs, as they seek to wait out the current crisis, due to fears of repeating the mistakes made during the financial crash of 2008, analysts have said.
The world’s top law firms are continuing hiring and holding back on making redundancies, despite declining profitability, new analysis from Thomson Reuters shows.
Law firms’ reluctance to lay off staff comes after the sector struggled to rehire those lawyers laid off in the wake of the 2008 financial crisis.
The report suggests law firms are now employing a “wait it out” strategy towards the current economic situation, which has now seen law firm’s profitability drop over four consecutive quarters.
The legal sector’s profits have dropped consistently over the past year, due to rising costs and a major drop in M&A activity.
The decline comes as law firms’ profits surged during Covid-19 on the back of booming demand for legal services.
The boom saw lawyers’ salaries surge to all-time highs as law firms were forced to compete in a sector-wide bidding war in order to recruit and retain top talent.
The talent war saw law firms’ direct expenses increase 10.9 per cent, in a shift that pushed down law firms’ profitability.
The combination of slumping demand and surging expenses saw average profits-per-lawyer drop 2.9 per cent in the second quarter.
Nonetheless, average profits-per-lawyer still remain 17.6 per cent higher than before the start of the pandemic.
Mike Abbott, head of the Thomson Reuters Institute, said: “Law firms are finding themselves squeezed by both slowing demand and rising expenses.”
He noted that while “firm profits have slid recently, they still remain well above pre-pandemic levels.”
Abbott added that the “lessons from the Great Recession are still on the minds of law firm leaders,” as he suggest law firms continue to “recognize the importance of taking a long term view”.