Most economists believe the U.S. is headed for a recession in 2023–or is already experiencing one. This will certainly affect law firms, but some will thrive while others struggle. History provides some clues as to which firms will succeed when and if the current economic tumult tips into recession.
In 2001-2002 and again in 2008-2009, major law firms failed. The names are familiar: Brobek, Dewey, Heller, Howrey, Bingham, etc. But others thrived on diversified practices built around organic growth and a shared sense of trust and firm culture.
Following the dotcom crash of 2001, major firms shut their doors. Brobeck, Phleger & Harrison failed when technology work dried up, exposing excessive salaries, debt and other commitments. Arter & Hadden closed in 2003 when attorneys balked at the firm’s aggressive expansion and increasing overhead. Both were among the country's oldest and most famous law firms, and others followed. The pattern was repeated during and after the financial crisis of 2007-2009. Again, the causes were familiar: deal work dried up and major clients faltered (Heller Ehrman closed its doors shortly after the Lehman Bros. bankruptcy); falling revenues exposed unprofitable offices and groups (Howrey); and debt-fueled recruiting binges saddled firms with exorbitant salary and other financial commitments (Dewey, Thelen, etc.). Serial mergers also undermined the culture at fast-growing firms, causing some to collapse (Bingham McCutchen).
At the same time, some firms succeeded and experienced growth and diversification despite economic challenges. In the decade following the Great Recession, only 27 of the AmLaw 100 firms experienced consistent year-over-year growth, according to ALM Intelligence data. Each of those firms undoubtedly employed a strategy that was tailored to its own market and situation. Generally speaking though, firms that thrived focused on planning, profitability, strategic hiring and avoiding reliance on debt to grow, as well as strengthening firm culture and succession planning, and demonstrating responsiveness to client needs and expectations.
History might be repeating itself. Coming off a two-year period in which many major firms have been outdoing each other in recruiting and salary wars and (mostly) doubling down on expensive office space and overhead, the profession now faces a faltering economy and global financial turmoil. Public companies and startups face pressure to rein in legal spend, and dealmaking has slowed. Unsurprisingly, law firm layoffs have already begun and, if history is any guide, more firms surely will face headwinds and potentially may go under.
By managing spend, innovating on client service, and diversifying across practice groups, firms can and will thrive in the current economic environment–even in a recession. Will we see a wave of firm failures in the next two years? Maybe. But there will be winners too.
