Winners and Losers: has Covid-19 created a divide amongst commercial law firms?

In 2020, the British economy suffered its worst annual downturn in 300 years as a result of the coronavirus pandemic. 

Gross domestic product (GDP) plummeted by 20.4% in April 2020 according to the Office for National Statistics, with no segment of the economy left unscathed by lockdowns and declining economic demand. However, despite a fall in revenue of 4.7% in the legal sector between March and April 2020, “Magic Circle” firms such as Freshfields Bruckhaus Deringer boasted a revenue rise of 3% in April, bringing them up to £1.5bn in annual revenues, and only experienced a minor dent in profit per equity partner. 2020 proved to be Clifford Chance’s best year ever, with revenue increases of up to 6% to a whopping £1.8bn, which was boosted by its international expansion. Conversely, Travers Smith, a traditional UK firm, saw their profit shares fall by 20%, while net profit shares fell 11%. Is this indicative of a growing divide between commercial law firms?  Bruce McEwan, president of law firm consultancy Adam Smith Esq., remarked that the results of the recent financial year brought about a ‘whiff of we dare you to match this’, pressuring smaller firms to match profit rates achieved by their big-league counterparts.

Amid the fallout from the pandemic, the ‘winners’ appeared to be those with expertise in a wide range of counter-cyclical areas – areas that typically become busier during an economic downturn. This includes restructuring, bankruptcy and employment law as well as distressed M&A. These are legal fields that are frequently dominated by Magic Circle and Top US commercial law firms. Furthermore, international expansion proved to be a key factor in the success of high-end firms, particularly within the US market, as demand for banking and litigation expertise surged throughout 2020. 

This means smaller firms are having to bear the brunt of the pandemic, as common sectors which were once booming, such as personal injury, have declined rapidly as lockdowns meant that potential customers stayed at home.

This new divide may also serve to expose the outdated way in which legal services are delivered. As stated by Forbes, technology has become an ‘operational lifeline’ for law firms, and it is unlikely that things will go back to normal after the pandemic. Bigger law firms seem to have adapted quicker to the shift – utilizing videotelephony software programs and artificial intelligence to communicate with clients, international offices and amongst themselves - a luxury that smaller firms cannot afford. 

However, the extent to which Magic Circle firms fared better than their silver circle counterparts was called into question when top commercial firms Linklaters and Allen & Overy reduced partner distributions to save cash as well as freezing salaries for junior staff. 

At first glance, this may appear to be the actions of firms struggling to stay afloat during the coronavirus lockdown, but in reality, it is the actions of firms who through their previous successes have been able to able to garner enough capital to stay afloat, something which cannot be said of their smaller counterparts. Allen & Overy have asked a number of partners to put cash into the firm so far – an option which restructuring partner Gareth Harris says is ‘always in the armoury’. In contrast, smaller firms like KWM quickly died out when partners refused to contribute cash to the firm. Participation in cash calls is essential in keeping law firms afloat in tough times; the reluctance of smaller firms to contribute as a result of limited finances and structural problems may be evidence that the growing divide could become permanent. 

Of course, the pandemic is not over yet – with the end of the financial year in April 2021, there is still enough time for struggling firms to get back on their feet. Therefore, the question of a divide between Magic Circle firms and their smaller competitors remains open.