It may therefore be useful to look to comparable period of economic turmoil and recession for how the economic impact of COVID-19 may impact business in Australia and more specifically the legal sector in coming months and years.

In September 2007 I was managing director and a significant shareholder of Millnet, a legal and financial document services business. We were readying the business for sale having steadily grown sales and profits over the preceding 10 years. Six months later the global financial crisis “CGC” had well and truly plunged the UK and global economy into chaos and the business was fighting for survival. 

Today, having relocated back to Australia in 2018 and now in the role of managing director of Sky Discovery as I and the team at Sky seek to chart our way through these uncertain economic times I find myself reflecting on the lessons learned from how we and the UK legal sector reacted to a dramatic economic shock.

How the economic impact of the GFC on the UK economy was comparable to the economic impact of COVID-19 on Australia

Australia escaped the global recession associated with the GFC relatively unscathed and was one of the few major economies to avoid a recession entirely (defined as two consecutive quarters of negative growth). By comparison, in 2008 the UK entered a post-GFC recession, which ultimately saw five consecutive quarters of negative growth resulting in an almost 7 per cent contraction in the overall economy and a total cost to bail out the banks and stimulate the economy equivalent to 20 per cent of GDP. To put this in perspective, the Morrison government has thus far announced government spending measures equivalent to approximately 10 per cent of GDP and Australia has never seen a recession as deep or as long-lasting as the post-GFC recession in the UK.

The following represents a list of six key lessons learned and observations I believe will apply if Australia goes into recession in coming months. 

1. If staff cuts are a necessity be strategic

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There was an almost immediate drop in billable hours across most firms even in practice areas such as disputes and investigations that ultimately benefitted from the GFC fallout. As revenues plummeted and uncertainty prevailed most firms entered a phase of cutting staff costs.

My advice – be strategic and consider the skills that are going to be in demand when business picks up again. In the UK, many law firms cut headcount in their in-house eDiscovery teams (in some instances eliminating them entirely) only to find that those skills were in high demand and scarce as litigation and investigation workloads picked up. Quite a few in-house eDiscovery staff commented that they had been first in line to be cut owing to comparatively lower levels of billable hours versus other fee earners. Several years after the GFC law firms found themselves significantly short of skilled staff and losing business to the likes of big four accounting firms who had strategically grown their investigation practices during the downturn in anticipation of the tsunami of work that ultimately flowed from the economic turmoil.

2. Triage was critical to preparation for inevitable investigations and disputes

The collapse of so many financial institutions and reverberations through the UK and global financial system invariably led to more than a decade of disputes, investigations and regulatory response. It was impossible to address all of the potential areas of risk or actions that might arise at the time however the smartest lawyers and consultants were busy offering services and expertise to address issues such as identification and preservation of key custodians, their data sources such as emails, messaging, mobile devices etc. and early case assessment advice often within limited budgetary parameters.

In many instances there was a significant time gap (years) between events arising from the GFC and disputes and/or regulatory investigations. Firms who invested in triage services saved considerable cost and mitigated the risk of unfavourable outcomes. In some instances the process of simply preserving data sources was an effective insurance policy.

3. Corporate clients under budgetary pressures demanded real cost savings

Alternative legal providers had been marketing their services to law firms and corporations prior to the GFC however it wasn’t until budgets were being slashed by corporations that law firms found themselves having to get onboard with offering their clients low-cost options for first-pass review and other tasks typically performed by paralegals and junior lawyers at law firm rates anywhere up to 10 times as high as outsourcing options.

Concurrent with this change, corporations were increasingly receptive to engaging LPO and/or eDiscovery providers directly by the corporation and therefore effectively “upstream” from law firms. The rationale was simply that LPO/eDiscovery firms would and did yield significant cost savings via a combination of leveraging technology and wage cost arbitrage versus the traditional law service model. Frankly, prior to the GFC corporate legal departments were inclined to simply outsource matters on a one-stop-shop basis to law firms without really considering alternative approaches and in some cases it was the CFO or even CEO who applied pressure to achieve cost savings often because they had been approached directly by service providers.

4. Innovative law firms won business from larger rivals

As corporate legal departments were facing squeezed budgets they were far more receptive to the service offerings (and cost savings) of mid-tier and boutique law firms. The best mounted effective marketing campaigns around legal issues and services of most relevance to the post-GFC business environment and legal challenges. Corporate legal departments were more open-minded to hearing from firms outside their typical “panel firms” particularly in circumstances where they perceived that panel firms were charging excessively for paralegals and junior lawyers.    

5. Adoption of technology and outsourcing accelerated

It may seem obvious that technologies such as videoconferencing, team chat, secure file transfer and eDiscovery platforms such as Relativity and Nuix have become instant necessities in the current environment with most lawyers working from home and geographically distributed.

What perhaps isn’t as obvious is that the adoption of technologies, which enable law firms and their clients to shift away from high-cost fixed in-house investment to variable, flexible on-demand technology and services gained momentum. Cloud computing solutions based on AWS and Microsoft Azure platforms accelerated and firms were far more open to managed service offerings versus in-house investment.  The rationale was clear – costs would flex up and down with demand and the management overhead associated with in-house technology and people is largely eliminated.

6. Client-focused creative business development efforts paid dividends

When matters go quiet and lawyers are scratching around for billable hours whilst clients are under significant budgetary pressures, it was an ideal opportunity to be collaborating with clients to better understand their changed pressure points and demands.

By way of example, clients facing potential litigation whether as claimant or defendant were extremely reluctant to incur high upfront costs to get started on new matters such as those traditionally associated with per gigabyte processing of electronic data. Likewise, clients were not prepared to engage law firms on the basis of their usual hourly rate charging structures.

The solutions included integrating new technologies into the service offering to eliminate upfront charges, experimenting with fixed fee service models often for each stage of a dispute or investigation, taking a risk on simpler volume-based pricing such as per document rates for legal review and leveraging a combination of advanced technologies (now broadly referred to as AI albeit with some poetic licence) to boost productivity and outsourcing/offshoring to benefit from labour cost arbitrage.

What happened next? Post-GFC economic recovery

There was no immediate tsunami of new matters directly attributable to initiatives commenced during the GFC recession however it positioned us and innovative law firms’ clients as front of mind when the economic recovery was in full swing.

We emerged from the GFC recession having trimmed or eliminated areas of our business that had been in long-term decline such as printing of prospectuses and we were focused on our core eDiscovery offering targeted at lawyers in law firms who had little or no in-house eDiscovery investment to offer corporate clients a better more cost-effective service.

Over the six years from 2009 to 2015 our revenues grew at an average rate of 50 per cent year-on-year and we became the leading independent eDiscovery consulting practice in Europe. In 2015 we were in a position to restart the process to sell the business, which we had abandoned immediately prior to the GFC in 2008 and we ultimately sold the business to a US eDiscovery company in 2016 for an undisclosed price suffice to say that was 300 per cent more than the price we were seeking for the business in 2007.

By James Moeskops, managing director at Sky Discovery