Not far behind is anxiety about the impact on their firms of the sudden onset of a recession, and economists’ predictions of a depression. The unknown depth and duration of the financial carnage COVID-19 will leave in its wake is already starting to ripple through firms in the form of diminished demand and time entry. Increased write-downs, cash conversion cycles and write-offs keep every chair’s eyes open at 2 a.m.
Just when BigLaw felt like it was back on its feet after a long recovery from the 2008 financial crisis, it’s all hands on deck to batten down the hatches and navigate the storm. What follows are a few reminders of past lessons learned and some new ideas on how best to navigate the passage safely.
Firm leaders are struggling to choose what assumptions to make for financial modeling. Fear of being the first to make unpleasant attorney and staff cuts seems to be driving an optimistic approach to forecasting, to wit, a three-month downturn from April to June. While this may be an appropriate scenario, simple six-, nine- and 12-month projections can be easily extrapolated and augmented as performance data becomes available and will help to more realistically frame the hard but necessary decisions ahead.
Perhaps the best data to use for the early forecasting needed now is daily and weekly time entered as demand slows. Comparing this with two- or three-year history of time entered over the same period and the resulting rate-adjusted collections will enable you to project what your collections might look like for recent time entered. Realization is likely to slip; tweak your numbers accordingly. Modeling a moderately slower and lower rate of conversion to cash makes sense. Check to make sure you account for any extraordinary matters in the historical data. Finally, remember this isn’t a cost-accounting exercise; approximations are fine.
BigLaw’s relationship bankers have been encouraging firms to increase borrowing ever since firms decided they would prefer to rely more on partner capital than bank-financing post-2008. The lesson learned was that partner capital comes without bank covenants. A covenant that required firms to maintain a certain number of partners got in the way of counseling out underperforming partners in firms on the brink of failure, as happened with Heller Ehrman LLP and Dewey & LeBoeuf LLP, among others.
COVID-19 has opened a new window for the banks. It looks like this:
Why not draw down the whole line of credit and even increase your limit? You may not be able to draw it down later (because your line is uncommitted or because at a later date you may not be able to represent to the bank that there is no material adverse change in your financial condition, as you are almost certainly required to do as a condition of drawing down the line). And, the money is so cheap it’s almost free. Borrow now. Borrow more.
These are the relationship bankers speaking, not the underwriters. They want you to have bigger lines and borrow more money. They are the same relationship bankers and the same banks who wanted firms to borrow more money in 2006 if they covenanted, among other things, to maintain a certain number of partners. Then, the underwriters called the loans when firms tried to strengthen themselves by right-sizing in the downturn.
You can’t not like relationship bankers. That’s why they’re so good at what they do. But there is no such thing as free money. Even if they tell you everybody else is drawing down their lines, be careful. Don’t follow the herd without understanding your circumstances and loan terms.
You may have borrowed based on your borrowing base, tied to accounts receivable and work in process. You’re probably required to pay down your line once during the year. The wrong combination of borrowing terms could turn your endgame ugly. For example, if the downturn is a little longer than expected, many firms will face a double-edged sword: They will have to clear out their lines and will need more money, both happening when their borrowing base has shrunk because of the downturn. A lender’s “gotcha” moment you don’t want to face.
Don’t forget the lessons of 2008. Remember Heller. Remember Dewey! Both went bye-bye. There is no Santa Claus. There is no such thing as free money. Money that you borrow from your partners doesn’t have bank covenants. It helps you avoid bank covenants instead of triggering them. Except for some firms’ ordinary practice at the beginning of their fiscal year, in tough times don’t borrow money to pay partner draws, particularly without telling your partners.
A Word About Relying on China’s COVID-19 Data and Experience
Fully drawing down lines of credit now has been defended on the grounds that the COVID-19 will be short-lived and hence the same for its financial impact. BigLaw’s thinking has been that China has eradicated COVID-19 and is going back to work after just three months. China did start shutting down about three months before the Chinese government ordered everyone back to work. But we don’t yet know whether that is working.
We might soon find out that that a second wave of contagion occurs when China abandons social distancing. There is already evidence of an uptick in new cases on the mainland and in Hong Kong attributed to people entering China from other countries. The incubation period for contamination tracing back to these people could take two weeks or longer.
Even more than in an economic downturn, attorney and staff cuts during a health crisis are dreaded decisions to make. Many firm leaders have already understandably indicated a desire to avoid them almost as much as COVID-19 itself.
Let’s start with a carefully worded sine qua non. A well-running firm can’t achieve a material reduction in overhead without trimming associate overhead. Period. Stop. End of sentence.
In 2008, BigLaw was revving at 12,000 revolutions per minute and 230 miles per hour headed into the final turn for the year when the financial wreck smacked into its windshield. Latham & Watkins LLP hit the brakes first and hard with a 400-plus person layoff, and most of the field followed with cuts.
Today is different. We may be headed into a financial wreck, but we’re not revving at 12,000 rpm. We’re not in a hiring bubble like we were in 2008. Some nice, slow, even pressure on the brakes is what is called for. This downturn is most likely to be shorter in duration than the last. This may not be the time to shed hard-to-recruit personnel and replace high-potential and high-performing talent if it can be avoided. Go slow.
Although hard to administer, going to a firm-imposed, across-the-board associate part-time model with a corresponding cut in pay may be the solution. For instance, put associates on a six-month, four-day work week and cut pay 20%. This should yield a 10% cut in associate overhead. You can do the math if you need bigger savings. This way, everybody is in it together. If the downturn runs unabated into another quarter, cut back by another 20%. This same model could be run for many staff support positions. To walk the walk, partners should take similar or larger haircuts.
For this to work, firms will need to amp up their commitment to even work allocation across the platform. All lawyers should commit to making sure associates get their fair share of work. Everybody should acknowledge that there will be exceptions. Some associate work simply isn’t interchangeable. This becomes truer the more senior and the more specialized associates become. And, matters like trials and restructurings still need teams that can work around the clock.
But BigLaw’s associates certainly have the bandwidth to work across practice areas; in many instances all they need is direction, flexibility and ingenuity. If clients understand that the staffing changes are being made to protect talent for the future and the firm is willing to absorb the cost, clients are likely to understand. Many will even like the opportunity to work with more great young lawyers.
In the “all-for-one and one-for-all” department, voluntary furloughs should be encouraged. With many schools closed for the year, some folks might desire a COVID-19 furlough. That’s a good thing.
A word about this year’s summer programs, and on-campus interviewing and hiring class size next fall: It is self-evident that the former will have to start later than mid-May. Whether cut in half or to just two weeks in July, there are savings to be had. As to the latter, probably too early to make decisions.
And finally, attractive loan terms for lawyers who want to voluntarily defer some of their income for a year is a lot more attractive borrowing proposition than one that means facing a lender’s wrath while trying to navigate the shoals.
After associate headcount, real estate is likely your biggest bogey. As part of your modeling, a deep dive on real estate costs office by office may yield results. Are there any opportunities to defer rent or renegotiate terms? Some landlords will be under financial pressure. Others will have flexibility. Both can yield cost-saving opportunities. Find and start exploring your best opportunities now.
Firms have created a remarkable volume of impressive, valuable, content-rich COVID-19 client alerts and web content, and they’ve kept them up to date. Many of them have created special multispecialist teams. For multinational and other large-company in-house lawyers, this can be the equivalent of a blizzard-like whiteout. Making the content searchable can be a huge help. And, believe it or not, printing it into an indexed compendium that can be used as a desktop reference book during the crisis may be invaluable. Put your firm’s name on the spine. Odds are it will wind up on your client’s bookshelf serving as a billboard in their offices for years to come.
Most of all, don’t forget the empathy. A personal call or even a voicemail checking in and offering to help formally and informally can create ties that bind for years.
BigLaw has made remarkable progress with value pricing and reining in individual partner latitude on pricing. The COVID-19 downturn may provide an opportunity to flex new pricing muscle. Big flat-fee deals and subscription pricing through the downturn may be attractive to clients.
During the 2008 downturn, Paul Weiss Rifkind Wharton & Garrison LLP entered into a nearly nine-figure flat-fee deal with Citigroup Inc. for a portfolio of litigation that ensured strong cash flow and turned to its long-established pool of contract attorneys to produce appropriate margins on the client-friendly pricing. With the benefit of hindsight, the deal also appears to have further strengthened the relationship between Citi and Paul Weiss.
Not all firms will have opportunities on this scale, but thinking out of the box to align your firm’s interest with your clients’ interests on pricing in the downturn will yield goodwill and strong cash flow at the same time, and the work will enable your firm to keep the keepers among your lawyers.
In the world of the more traditional, some firms buy work by discounting fees. We have never encouraged that in a strong economy, but in a downturn that is expected to be short, it may be a good idea. Less expensive than layoffs followed soon after by recruiting and rehiring.
Whoever said BigLaw can’t change on a dime? Witness the nearly immediate pivot to an all-remote-work model that quickly spread from Seattle across the country well ahead of government’s making social distancing the law of the land. Years of investment in technology advances often made to meet the needs of lawyers in need of an alternative track to partnership have paid of big time, as apparently every BigLaw firm and countless boutiques went all-remote over the course of a week.
Real-time and daily-time entry will be what makes the difference between firms that succeed at all-remote work and those that don’t. Gamification may be a successful tool to help flip this switch. Badges and rewards (even instant “pats on the virtual back”) for lawyers who get their time in every day might help. Rewards could be things like redeemable firm points to be traded in for expense account dollars that can be used to buy everything from home-delivered meals and beverages to other online purchases.
A SWOT and a Goal
In closing, bring a small leadership group together for a SWOT. Do some brainstorming on what your greatest strengths, weaknesses, opportunities and threats are. Prioritize them. Address them. And set a goal to come out of the COVID-19 downturn a stronger firm than you are today. Let that be the divining rod for every decision you make.
We are in a teachable moment. The lesson is about ownership. My partners and I are often asked by our clients how they can get their lawyers to behave more like owners. Getting them to give up old dogmas and come together to innovate on new ways of working together can create a powerful next generation of owners. Don’t let the COVID-19 crisis go to waste.
Correction: An earlier version of this article misstated the approximate value of the Paul Weiss-Citi flat-fee deal. The error has been corrected.
Peter Zeughauser is chairman at Zeughauser Group.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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