Seeing opportunities in times of crisis

How law firms can bend adversity into competitive advantage

Mexico City, 21 March 2020

The old proverb goes that one should never let a good crisis go to waste. Even in these dark days of crisis, economic contraction and social isolation, there is an option to look for opportunities, see silver linings and spot learning opportunities that can give law firms a competitive edge after the recovery. But that requires a conscious choice, strategic clarity, leadership and operational agility.

The shock effect created by the COVID-19 pandemic is starting to morph into one of the worst economic downturns in modern history, with one of the steepest and most sudden declines in activity ever recorded. 

It is still early days to assess the overall impact, but recently published scenarios range from a 14% (JP Morgan) to 24% (Goldman Sachs) contraction for the US economy in the second quarter of 2020, accompanied by a quick surge in job loss. East Asia already saw similar contractions, and Europe is poised to go down the same path. Emerging markets are likely to be hit even harder. This leaves central banks and governments all over the world scrambling for unprecedented fiscal and monetary policies to stop the bleeding. Mexico’s central bank, Banxico, had already lowered growth forecasts for 2020 at the end of February, expecting lower GDP growth of between 0,5% and 1.5%, after negative growth in the last quarter of 2019. The central bank cited persistent weakness in internal demand and a possible cut to the credit rating of state oil company Pemex, in addition to market pressures generated by the coronavirus outbreak. 

This week several investment banks issued significantly more negative forecasts, Credit Suisse for instance now expecting a 4% contractions for 2020, down from an earlier expected 0.7% modest growth scenario. 

The impact of the coronavirus in Mexico is further exacerbated by the carnage in global oil markets in the wake of the OPEC meeting on March 8th, leading an all-out price war between Russia and Saudi Arabia. Since the start of the year, the price of nearby NYMEX crude oil futures fell over 58%, and Brent crude -the international benchmark- falling below US$25 per barrel, the lowest in nearly 20 years. These conditions also impacted the exchange rate, with the Peso’s value now fallen to record lows and trading at 24 to the dollar.

This perfect economic storm bodes little good news for Mexico’s legal market, already struggling with uncertainties in the market and a slump in transactional activity. 

These challenging times, however, always come with opportunity, especially for law firms. The FT ran a remarkable story last week about how the COVID-19 crisis led to a surge in work for corporate lawyers, citing a 25% surge in demand mostly stemming from ‘emergency matters’ in relation to the calling of force majeure clauses in contracts, leading to disrupted supply chains, insurance issues and renegotiations of ongoing M&A deals. 

This is indeed a potential source of demand Mexican law firms also seem eager to explore, with several firms sending memos and client alerts examining the impact of COVID-19 on contractual agreements and other obligations under Mexican law. 

Another obvious area of increased short-term demand is labor law, where law firms are experiencing a surge of questions, such as the application of preventive measures that that employers should consider and their legal obligations in the event of a possible declaration of health contingency by the Ministry of Health.

Other areas that will see a spike in immediate demand are those practices that can advise on the regulatory and fiscal responses by government to this unfolding crisis (tax, trade and customs, competition/antitrust, regulatory). 

The real question, however, is to which extent and how long companies will continue to pay for such rapid-response support and advice, and how long that sense of emergency will last. 

In the medium-term, the typical counter-cyclical practice areas such as bankruptcy, restructuring and litigation will likely see a surge as well. Firms with a strong transactional focus that have not diversified yet into these practices are likely to suffer more from the downturn than others. Rare bright spots for such firms will come from opportunistic buyers, such as private debt and equity funds and cash-rich holding companies, as asset prices come down.

The way this crisis will affect aggregate demand for legal services in the long run will largely depend on the overall size and shape of the downturn and the reaction of companies and their inhouse legal teams to this economic shock. 

But law firms need not passively undergo these market dynamics. Their preparedness and operational capacity to quickly react and adapt to these changing market circumstances are probably the most important factors determining their future success or, indeed, chances for survival.

In choppy waters, you always see some law firms going numb, sinking to the ocean floor, and surviving as scavengers on whatever carcasses that come falling down from the surface. On the other hand, you will have law firms that understand how to stay on top and “surf the waves”, using adverse market conditions to their advantage, as dolphins.

Dolphin firms are completely in tune with changing client demands, understand how to connect and stay close to the market through new technologies and superior relationship-building strategies. They are precise in their focus, and fast in terms of decision-making and strategy execution. They know they have to be cautious with their supply-side cost structures but need to double down on client and business development initiatives.  

There is room for growth in downturns as well. Firms that prefer a ‘wait-and-see’ approach will inevitably lose market share to Firms that have a plan, and clearly understand how and where they can offer superior value and client experiences. 

In this zero or negative growth environment, clients will scrutinize law firms’ value proposition more closely than ever. This creates golden opportunities to the ‘dolphins’ but bears bad news for Firms that stick to usual recipes and status quo.

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