🤿 Sunday Deep Dive: Recession or Not - Legal is Here to Stay.

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Legal Operations
Industry Insights

If it were the year 2000 or perhaps 2007, you’d be chatting about it around the water cooler. Or maybe sending a few texts on the topic from your slide-up Nokia. Now the threat of a recession is a hot topic at every tech firm’s kombucha station and Friday night Zoom drinks. Will we? Won’t we? How bad will it be? Does the Fed know what the heck it’s doing? Why does a tank of gas cost more than my law school debt? And why did I not appreciate it more when things were normal back in 2019? These are all good questions without clear answers. We’ll try to answer them as best we can. Plus, we’ve got a few tips for getting through it.

Wait, why are we talking about a recession?

In 2020, the US government released the largest sum of federal money in recorded history. Around $5 trillion went to households, businesses, local governments, and healthcare providers to help them cope with the impact of the pandemic. Amidst all the uncertainty, penny-pinching became the norm. Many held onto their federal checks. Plus, with restaurants shuttered and borders closed, people who didn’t receive anything from the government saved too — after all, one can only spend so much on pet food subscriptions, craft kits, and home gym equipment.

This period of saving was followed by a spending boom as the economy opened up and wages surged. In 2021, spending in major US cities was up 15% compared to 2019. But Covid had stuck a wrench in the works of the global supply chain and getting things back up and running again would not be as simple as tightening things back up. Demand exceeded supply, pushing up prices. The conflict in Ukraine sparked the flames further by creating even more shortages. Shipping costs ballooned by 350%. Wage growth continued to skyrocket. And, as you will no doubt have noticed, consumer prices have rocketed.

Enter the Federal Reserve. One of the Fed’s responsibilities is to manage inflation. Their target for inflation is 2% (a stark contrast from a rate of 8.6% this May). One of the levers they can pull to lower inflation is to increase the interest rate. Last month, they did exactly that. In fact, it was the biggest interest rate rise in almost 30 years — from 1.5% to 1.75%. The Fed indicated that further rises are due-up, with hikes of up to 3.4% by the end of the year.

Well, is there a plan?

So the goal is to lower inflation. In practice, the Fed is on a precarious teeter-totter. Keep interest rates too low and inflation will continue, making it difficult for consumers to afford the things they need. Push interest rates too high and the economy could be pushed into a recession like the one in 2008. Spending will slow, the economy will contract, and millions will lose their jobs.

A third possibility is a “gentle mini-recession” which is, as New York Times journalist Jim Tankersley put it, “almost like putting a patient in a coma temporarily” to save its life. In that ideal, likely fictional scenario, inflation would slow, the economy would be in negative growth but you wouldn’t see a major spike in unemployment and the slow-down wouldn’t be tangible for the average American.  

Nobody knows which of these scenarios is coming. Betting on the middle-ground, The Economist says, “Given the strengths of the economy today — flush consumers, solid businesses and safe banks — the next downturn ought to be mild.” The White House is optimistic too. Biden is backing the Fed, saying he’s confident it can find the right balance. But the market is not so sure.

Investor pessimism has manifested in a bear market (i.e. when stocks crash by 20% or more from a recent peak). In June, the Nasdaq Composite index dropped faster than during the 2000 dot-com crash and the 2008 financial crisis, falling by more than 30% compared to November 2021. Tech stocks were particularly badly impacted. In other words, investors see a recession coming. But investors have been wrong before.

That’s enough Econ 101. What about my job?

With all this negative energy around, hiring is slowing down. But the picture is complicated. May saw the lowest monthly job growth since early 2020 yet the job market remains hotter than expected. The news from the tech sector seems more sobering. Meta, Amazon, Uber, and Robinhood made headlines by revealing hiring freezes or major layoffs. These announcements seemed to indicate a general trend in the sector. Commentators claim that tech is a bubble that’s long been due to burst and that tech firms over-hired during the pandemic when money flowed from government coffers and tech stocks were robust. A hiring slowdown could also be attributed to an uber-conservative VC environment, as investors prep for a recession. Despite all that, however, experts claim that headline-making hiring policies are not an indication of a wider trend in tech. Major changes to hiring strategies may in fact be isolated incidents.

If there is a cooldown in the job market, nobody told legal. According to Law.Com, we’re “in the midst of an in-house legal talent-hiring spree.” There are a number of reasons why this is happening.

  1. The endless stream of new tech start-ups keeps flowing and they all need GCs.
  2. We’re in a fast-changing regulatory environment with rapid developments in areas like data privacy, anti-trust enforcement, crypto, and ESG. This makes it more important to have good legal advice on hand.
  3. Inflation and the impending recession may be pushing some businesses to expand their in-house teams to cut down on outside counsel spend.
  4. Legal teams are starting to play more of an active role in business strategy which means they’re an even better ROI.
  5. Lawyers have more options and the Great Resignation has changed people’s mindset when it comes to work. Platforms like Lawtrades, which offer flexibility and autonomy, are putting pressure on the traditional in-house model.

If a recession does come, companies’ legal needs are going nowhere. They will just get more creative in the way they meet those needs.

Freelancers for the long-haul

We might see more of a shift to freelance contractors, as companies try to remain agile amidst uncertainty. Freelancers are cheaper, more flexible, and allow companies to increase/decrease spend as needs arise. In the 2008 crisis, law firms pushed up their rates to compensate for the lack of work. If this happens again, contractors and in-house hires will only start to look more attractive.

Tech take-up

A recession environment could also accelerate the adoption of legal tech and automation to reduce the payroll bill. Bloomberg Law reports that the number of organizations that report increased efficiency due to the adoption of legal tech rose by 50% between 2019 and 2020. And 91% of law firms are adopting tech to help cut costs. Automation can be particularly useful for speeding up time-consuming, high-volume, repetitive work in areas like contracting.

Bye-bye flexi work?

Recessions typically mean layoffs which means the power in the job market shifts towards employers. If that happens, it could give companies the ability to force employees back into the office. But we’re in a different situation now than we were in previous recessions, with twice as many job openings as there were prior to both 2001 and 2009. Leaders in the legal industry say that office reopenings could in fact slow in the case of a downturn, which makes sense given that office space is a major expense and, unlike in previous recessions, remote working is now fully tried and tested. This one remains a question mark.

How else will this impact legal?

Cutting the budget

In the case of a recession, or even simply with the threat of one looming, in-house legal teams will be asked to cut their budgets. We’ve already mentioned making use of freelancers and incorporating legal tech and automation into your workflow. Prioritization is another budget-cutting strategy. Teams can identify high-risk and high-revenue areas of the business and focus attention on those while parking expensive, lower-revenue, or lower-stakes projects.

GCs should make sure they are in close communication with the C-suite to ensure that prioritization decisions aren’t top-down without insight from the legal department. Legal ops specialists should conduct regular internal reviews on your workflow to ensure that you are making the most of your current spend.

Countercyclical practice areas

Some areas of law tend to see more action during a downturn. These include:

Litigation law

When times are tough, individuals and businesses are more likely to use legal means to recoup money or avoid paying money. This includes commercial litigation and regulatory actions - all of which could potentially impact tech companies. Companies can prepare by:

  • Ensuring relationships are founded on clear, watertight contracts
  • Encouraging transparency with clients and suppliers to avoid surprises
  • Making sure they’re covered by insurance
  • Finding non-legal ways to resolve disputes

Labor and employment law

If businesses are forced to downsize rapidly, this can invite employment-related claims, especially if former employees are unable to find a new source of income. Businesses can prepare by:

  • Crafting clear, watertight employment contracts
  • Planning ahead and limiting hiring rather than issuing dramatic mass layoffs which stress out your workforce and cause brand damage
  • Looking at furloughs and hours reductions as alternatives to layoffs
  • Communicating with employees so they feel included
  • Fostering good relationships with employees so there is no resentment festering if they do get fired
  • Finding smart ways to minimize risk - such as hiring freelancers and adopting automation instead of locking into employment contracts that could end in redundancies.

Restructuring and insolvency

Hopefully, your in-house team won’t be involved in this practice area but if the you-know-what does hit the fan, this is another area that might keep lawyers busy.

As always, the best advice for legal teams is to get educated and think ahead. Keeping on top of the latest developments and reading up on the legal impact of previous recessions can help you provide helpful answers and reassure the C-suite when they approach you with concerns. Anticipating risks and shielding the company from them as best you can will make legal an invaluable asset in uncertain times.

According to research conducted by Bain, the top 10% of companies saw their earnings climb during the Great Recession in the late 2000s and continue to climb afterward. What these companies had in common was good preparation. They had plan Bs. They had talked through the what-ifs. Nobody wants a recession but when the going gets tough, the tough get going.