The challenges posed by considerable distances and time zone disparities in cross-continental operations are undeniable. Before the COVID-19 pandemic, cost reduction efforts led many companies to seek suppliers in distant destinations, with Asia being one of the most attractive hubs. However, global supply chain disruptions originating from the pandemic were proof that these challenges can end up negatively impacting the efficiency of production processes. With nearshoring, businesses aim to mitigate these issues by bringing outsourced production centers closer together, thereby enhancing collaboration and addressing logistical obstacles much easier.

There has been a clear and growing trend of companies nearshoring their manufacturing operations to Mexico. A recent study from the Mexican Institute of Competitiveness found that linked to the relocation of supply chains in Mexico grew 47% during the first three quarters of 2023. For Asian companies, Mexico has become a very interesting alternative and a way to avoid the geopolitical conflict between the United States and China. 聽have already established themselves in Mexico, with those of Chinese origin having the greatest presence. Further, experts anticipate these numbers will increase in the coming years, predicting that Mexico has the potential to attract due to this phenomenon.

The impact of nearshoring

Not surprisingly, nearshoring has introduced both challenges and opportunities for law firms in Mexico. Most of the businesses that come to Mexico to embrace nearshoring are foreign companies that in some cases are not completely aware of the country鈥檚 legislation, culture, and business dynamics, explains , a legal expert in competition, antitrust, and international trade. This provides a great opportunity for lawyers to help clients navigate their nearshoring projects successfully within the legal landscape.

According to Garza, clients are coming in different shapes and sizes. Clients and their projects are unique, each with a different scope, industry, project stage, and market objectives. Therefore, lawyers advising these types of companies need to understand that there isn’t a one-size-fits-all template or framework that can be applied universally, and instead they must approach each project on an individualized basis with custom-made solutions.

The need to collaborate

In the context of nearshoring, legal guidance requires strong teamwork between legal practitioners with experience in different fields and practice areas. Garza describes how several legal practice areas have been the busiest, due mostly to legal work around the relocation of supply chains. Additionally, she considers the coordination among these practice area lawyers to be fundamental in order to serve companies in the best possible way:

Corporate 鈥� It is common that one of the first steps in these types of projects is to establish a legal entity. Lawyers need to inform their clients about the various types of companies that may be incorporated in Mexico, along with the rights and regulations that are involved. Selecting the correct corporate structure is a key factor for creating a successful business in Mexico.

International trade 鈥� Mexico is party to many free trade agreements (FTA), and it also offers diverse manufacturing and export promotion programs with interesting and attractive benefits for investors. In addition, if companies wish to export their final goods into the US or Canada, it is crucial that their businesses operate within the regulatory framework of USMCA 鈥� the trade agreement between the US, Mexico, and Canada 鈥� which has stronger terms compared to the NAFTA. Understanding how these treaties and programs apply to a client can make their operational processes more efficient and reduce significant costs.

Labor 鈥� Most of the projects that embrace nearshoring involve manufacturing, which of course, is known for being labor intensive. Given this, foreign businesses need to be aware of every aspect of Mexican labor law, including Social Security rules, profit-sharing, employee benefits, working hours, minimum wage payments, issues with unions, a ban on outsourcing, workers housing fund, and others.

Real estate 鈥� With 32 states in Mexico, each having distinct legislation and tax incentives to attract investment, the selection process for the project鈥檚 location becomes pivotal. Also, consideration of geographical factors, infrastructure, and availability of resources, such as water and energy, holds significance as well. Following the decision on a project’s location, conducting proper due diligence becomes imperative to ensure that the intended land acquisition adheres to the necessary legal permits for purchase or lease. Otherwise, an evaluation may be necessary to determine the steps required to meet these conditions.

Tax 鈥� This aspect becomes fundamental in order to determine the level of profitability for a project. Lawyers can play a significant role in designing optimal fiscal schemes that comply with Mexican tax laws and benefit from certain double-taxation agreements.

Compliance 鈥� Due to the nature of nearshoring, compliance extends beyond adherence to the company鈥檚 governance guidelines and rulings, and domestic laws; it involves aligning with the regulations of the countries encompassed within the entire supply chain and the FTAs involved. This entails monitoring the journey of raw materials and final products manufactured in the project, from their origin to their eventual destination.

Environmental, social & governance (ESG) 鈥� Comprehensive legal advice on nearshoring projects also must include guiding companies through the best international practices in ESG matters.

Foreign firms have come to Mexico to establish factories for decades; however, the projects coming in this new wave demand more complex and sophisticated solutions. These projects need to be integrated into global or regional value chains, and it is typical for the manufactured products in Mexico to be exported and commercialized elsewhere. Therefore, lawyers need to supervise every stage in the product supply chain and verify that the complete operational process aligns with the laws of the all the countries involved, including those of the final market.

Garza said that, in order for these projects to be successful, joint efforts from different practice areas and jurisdictions are indispensable. Lawyers have to transcend the mere comprehension of the Mexican legal framework and work with lawyers in other parts of the world. Additionally, they should take into consideration fast-changing global trends, technological advancements, and of course, the rise of artificial intelligence.

Looking ahead

The coming months are critical for law firms to leverage this nearshoring phenomenon by specializing further, coordinating efforts, and adopting an international perspective. The role of lawyers is not only to provide legal advice but to fortify incoming companies in all aspects, fostering a welcoming and well-advised environment for their ambitious business goals.

The recent development of nearshoring, accelerated by the COVID-19 pandemic and disruptions in global supply chains, demands a proactive approach from law practitioners. The legal community in Mexico stands at the forefront of this transformative trend, sensing legal needs and preparing to navigate the complexities of nearshoring while contributing to the creation of successful and sustainable supply chains.

In this current era of economic instability, it鈥檚 becoming clear that not all firms can ride the waves so easily. And while there are uncertainties in the economic outlook, there are also signs that any pain will not be shared equally. In the first quarter of 2023, for example, Midsize law firms have seen their demand grow by 1.8%, yet the larger Am Law 100 firms have seen their demand contract by 1.5%, a sharp reversal from that sector鈥檚 banner results in 2021.

Even in the current lukewarm economy, transactional work has declined significantly from its 2021 heights, and counter-cyclical work is starting to pick up. Transactional demand at the largest law firms was down nearly 5% over the past year, mostly due to contraction in mergers & acquisitions and real estate work. These practices were relatively strong at this time last year when interest rate increases were just beginning. The Am Law Second Hundred has fared slightly better, with firms there seeing a 2.7% drop in demand in these practices; but again, the beneficiaries are Midsize firms, which only saw their transactional demand dip by 0.6%.

Demand for counter-cyclical practices 鈥� defined as litigation, labor & employment, and bankruptcy 鈥� is accelerating. Litigation and labor & employment have been relatively strong since the third quarter of 2022, but Q1 2023 is the first quarter that they鈥檝e began really driving growth.

Again, these practices are not contributing to growth evenly across all sectors. Within the Am Law 100, demand for these counter-cyclical services is only up 1.3%, while at Midsize firms it has increased by 4%. In all three segments, litigation has been particularly strong.

These figures paint a picture that implying a strong correlation between firm performance and the current state of the economy. This may not be a shocking revelation, but it certainly implies that law firms鈥� fortunes in the latter half of the year are closely tied to the fortunes of the economy as a whole. The problem for many firms is that the economic outlook for the rest of 2023 remains uncertain.

A clouded economic outlook

Since the onset of the global pandemic, the U.S. economy has been surprisingly resilient. However, even the most optimistic lawyer can鈥檛 help but notice , such as continued high inflation and rising interest rates, relatively high rates of public debt, and ongoing geopolitical instability.

Recently, concern about the general health of the economy has been compounded by realizations about the fragile state of the banking sector. While most lawyers currently in practice have experience with various flavors of economic slowdown, a national banking crisis 鈥� as is well-remembered from the experience of 2007 and 2008 鈥� is another matter entirely.

鈥淭o the extent that banking becomes more fragile, law firms could be at risk,鈥� says Lawrence White, the Robert Kavesh professor of economics at New York University鈥檚 Stern School of Business. 鈥淭he other side of banking fragility is that if a law firm has a banking practice, that鈥檚 probably going to expand.鈥� White also points out that if there are more bank mergers, that will also generate additional legal work. 鈥淢y general feeling is demand for legal services by high-quality law firms is going to remain strong.鈥�

To better understand the health of the economy and the state of the banking sector, you should start with Silicon Valley Bank, where 90% of deposits were uninsured, White explains. That made the bank a bit of an outlier 鈥� but he notes that nationwide, more than 40% of deposits are uninsured and those deposits are held by a skittish 1% of banking customers. Anything that makes those customers even more nervous could trigger a scare such as the ones that affected not just Silicon Valley Bank but First Republic Bank and Signature Bank as well.

Indeed, there are three areas that are most likely to create further unease, says White: Commercial real estate, interest rate risk on the part of banks, and inflation.

Commercial real estate 鈥� With many firms鈥� return-to-office status in constant flux, weakened office occupancy could mean that those who own office buildings, and the banks that lend money to them, could be under strain. That strain won鈥檛 be felt immediately; instead, it will build as commercial real estate loans are rolled over and renewed, or, in the worst-case scenario, when building owners declare bankruptcy. At that point, the banks that hold those mortgages will need to take losses, which could unnerve still-skittish depositors.

Interest rate risk 鈥� In 2021 and 2022, banks bought long-term treasury bonds and long-term mortgage-backed securities at relatively low interest rates that still yielded a margin over deposits. With higher interest rates, those securities are now under water. Both bank analysts and uninsured depositors realize that will eventually affect banks鈥� balance sheets, especially if interest rates don鈥檛 come down.

Inflation 鈥� Of the three risks cited by White, inflation is the one he described as being most prominent in the popular debate about the economy. White says he鈥檚 鈥渁n optimist and I tend to think we鈥檙e probably past the worst of our inflation difficulties,鈥� Recent news has been encouraging 鈥� U.S. headline inflation grew only 3.0% in June, well down from its heights and close to 鈥渘ormal鈥� levels. But of course, there鈥檚 no guarantee this progress will continue if not reverse.

The surprising success of Midsize law firms

The success of Midsize law firms, compared to their larger peers, could indicate that their clients are seeking lower billing rates as general economic pressure persists. While other research has shown that large law firms are getting remarkably little pushback on their rates 鈥� even amid all the market chatter about it 鈥� a less-obvious type of pushback may be evidencing itself in other, less direct ways. Rather than balking at a firm鈥檚 bill or negotiating with an Am Law 100 firm directly, some clients may be sending more work to Midsize firms instead. In some practice areas, at least, the cost savings offered by Midsize firms may compensate for any perceived difference in quality.

In an economic slowdown, it appears that the largest law firms would have the most to lose. So far, they have been able to increase their work rates, which has somewhat masked the slump in demand. But inflation affects law firms just as it does other businesses, and the recent success of Midsize firms suggests that larger firms may not be able to raise their work rates at such a rapid pace much longer. While the hourly rate may appear to continue to climb, White anticipates that actual billing may take a hit. 鈥淭hey鈥檙e not going to decrease their rate,鈥� says White of the Am Law 100, 鈥渂ut in informal conversations, they鈥檒l throw more things into the package when they talk about what those bills will look like.鈥�

Of course, that strategy only works as long as compensation increases, and inflation remains moderate. In the event of a protracted slowdown or a return to higher inflation levels, large law firms may find themselves in an unexpected competition with their Midsize peers 鈥� one in which brand and perception matter, to be sure, but where fees become uniquely important.

For more on the economy with NYU Prof. Lawrence White and 成人VR视频 Analyst Bryce Engelland, check out the here.

• • • Interviews with more than 30 managing partners of global law firms indicated return-to-office planning is still being debated within many firms.
    • Indeed, 40% of lawyers indicated that they have complete flexibility concerning the days on which they report to the office, and 50% said they are working in a hybrid environment, according to Market Insights Standout Talent research, which noted these results vary across geographies.

Associate retention is still a delicate balance

On the question of associate retention, 46% of associates are currently seen to be flight risks, according to separate data from the 成人VR视频 Institute. And the three main drivers influencing whether lawyers will leave their current firms (beyond compensation) are i) management鈥檚 lack of regard for lawyers鈥� genuine well-being; ii) feeling under-appreciated or not seen; and iii) a lack of career progression.

Building a culture of well-being

At the recent event, small group discussions with CTOs revealed the strong need for firms and firm leaders to build a culture of well-being for their lawyers, especially those in hybrid work situations. This culture of well-being should be based on the following three pillars:

1. Defining clarity around how the lawyer鈥檚 role fits with the firm鈥檚 goals and what lawyers need to achieve to ensure their own progression;

2. Offering lawyers control over what, when, and how they work; and

3. Supporting people鈥檚 well-being, including offering training programs, and meditation and fitness apps.

Most firms have centered their well-being programs on support, even though efforts to increase clarity and control are shown to have the most impact on building a culture of well-being. Below are several of the best practices highlighted by the participating CTOs to help build this culture of well-being:

Clarifying performance expectations to increase control. Rearticulating to associates the expectations of their roles brought great clarity.聽 In turn, increased clarity through setting expectations enabled聽 increased control, and therefore, their wellbeing among associates.

Develop a 鈥榮tronger voices鈥� campaign 鈥� One CTO said her firm is tackling this objective through the creation of a 鈥淪tronger Voices鈥� campaign to highlight how people have dealt with mental health challenges. This helps with attorneys who may not be feeling psychologically safe nor able to bring themselves to work authentically.

Link improved well-being and connectivity through the benefits of the return-to-office plan 鈥� One law firm is enhancing its relationship-building and offering better support networks as a way to cultivate in-person connections at the office, according to another CTO.

Ways to expand appreciation

The culture of an organization is reflected in employees鈥� perception of the collected experiences they have in group settings and individual work. Consistency in behaviors that are aligned with the firm鈥檚 cultural values is necessary to align those values 鈥� often written on the firm鈥檚 website 鈥� with employees鈥� individualized experiences. Appreciation is a key mechanism to drive this consistency.

Little wonder then that the CTOs we spoke to advised law firm leaders to engage in the following actions:

Make appreciation personal 鈥斅燛ncouraging partners and team leaders to take the time to acknowledge and appreciate team members on an ongoing basis is more impactful than many firmwide initiatives. One CTO said her firm emphasized that it 鈥渁ppreciates people as 鈥榠ndividuals鈥� rather than a 鈥榞roup of associates鈥欌�� even though it is 鈥渉ard to do at the firm-programming level because that is dependent upon individual practice and matter teams.鈥�

Demonstrate appreciation through career development options or 鈥榓ppreciation鈥� programs 鈥� One of the best ways law firms can demonstrate appreciation is by employing a consistent commitment that underscores how the law firm cares about each associate鈥檚 career progression. Many law firms are working hard to offer different career paths in addition to the path to partnership.

Another CTO says his firm uses 鈥渁ppreciation points鈥� to identify a job well done and as a way to say thank you. Research also shows how valuable these programs work, even surpassing compensation bumps as a key retention tactic.

Ways to improve career progression

While many CTOs acknowledged the difficulty in offering career paths outside of the path to partnership, some innovative CTOs are experimenting. Here are some actions that are driving their success:

• • • Provide clarity of expectations and individual development 鈥� One CTO said his firm is employing a career lattice, which potential career moves happen laterally, downward, or upward rather than just a simple upward career trajectory.
    • Highlight associates鈥� ability to develop transferable skills 鈥� Some law firms have begun stressing how associates can develop transferable skills, and even acknowledging that associates are likely to move employers during their careers. Interestingly, this has generated loyalty towards the firm rather than encouraging associates to leave it.
    • Align partner compensation incentives to how well they train and coach 鈥� One law firm accomplished this through an upward evaluation process where partners are assessed on how well they 鈥渄emonstrate interest in [associates鈥橾 career progression鈥� and 鈥渟trong mentoring,鈥� says another CTO.

Challenges remain

Many law firms still have a way to go to address the talent challenges faced by their CTOs in today鈥檚 legal environment. Many CTOs were consistent in identifying two key challenges in return-to-office planning and associate career progression:

• • • Building a culture of feedback 鈥� One of the biggest challenges for law firms鈥� CTOs is gaining the buy-in from partners to deliver real-time feedback to improve associate retention. Feedback is essential for associates to know in which areas and how they need to improve.
    • Avoiding romanticizing the past 鈥� Another challenge, especially in the current hybrid work model, is the propensity of those in leadership to look at the traditional means of working in-person, in an office as some golden era to which the firm needs to revert. 鈥淚t鈥檚 quite shocking how much time we鈥檙e spending lamenting that,鈥� said one CTO. 鈥淚t鈥檚 a little wasteful.鈥� Another CTO indicated that 鈥渢his allure of lawyers learning by osmosis and working shoulder-to-shoulder is a real obstacle to moving forward. It wasn鈥檛 real, and associates didn鈥檛 see it that way.鈥�

Another CTO offered a more positive perspective. 鈥淚 have been harassing people about mentoring projects and maximizing mentoring projects for 15 years,鈥� the CTO says, adding that it鈥檚 good that others are recognizing the value in this now too. 鈥淲e now have an opportunity because people are focused on it.鈥�

Kimberly Sullivan, Co-Studio Director and Principal at Gensler, put forward that for all of its success, the work-from-home model was not going to suffice going forward in the legal industry. And she was not alone in this argument. Both Jim Jones, Senior Fellow at the Center on Ethics and the Legal Profession at Georgetown University Law Center, and Gretta Rusanow, Head of Advisory Services for the Law Firm Group of Citi Private Bank, (during their own State of the US Legal Market presentation) pointed their fingers at the model as a partial explanation for why young associates were so susceptible to lateral acquisitions. According to Jones and Rusanow, because associates had spent so much of their time in front of a screen rather than in an office, they never had the chance to develop the 鈥済lue鈥� that would hold them to the firm. In a conference defined by the war for talent, returning to the office became the first battlefront.

Thus, a Reversion faction emerged early in the Forum, first from the audience of the opening sessions and then by presenters who reinforced the idea later on in the conference. The argument was a simple one: culture would win out in the end. Those lawyers who willingly returned to the office would have a leg up on their absentee prot茅g茅e, and eventually things would sort themselves out. Lawyers who failed to return would miss out on social connections and tribal knowledge, thus weakening their standing within the firm. Indeed, if one wanted to make it as a lawyer in today鈥檚 market, they would have no choice but to return to the office.

Some modifications of this argument were less Darwinian, of course, with firms considering return to office mandates that would put everyone on the same footing. Either way, things would go back to the way they used to be.

Because associates had spent so much of their time in front of a screen rather than in an office, they never had the chance to develop the 鈥済lue鈥� that would hold them to the firm.

There was another argument that emerged, however, one which seemed to be of the opinion that opportunity can arise from crisis. Composed primarily of speakers, this faction argued for nothing less than revolution. Every presenter seemed to paint an increasingly rosy picture for the future of the law firm office. Technology hubs, bars, restaurant, massages 鈥� the future of the law firm office seemed to more resemble a lavish hotel or resort than a workplace. This was not unintentional. The faction focused on the idea that the best way to get people back to work was to make them want to be there. Jones used the term 鈥済olden handcuffs鈥� to describe the idea of retaining young associates by making the office, staff, and by extension the firm, indispensable to the lawyer鈥檚 work.

How would this vast expansion be financed? Well, it appears that the complete rejection of the work-from-home model may be premature. Lawyers have grown attached to the freedom which the model provides. In what is increasingly a seller鈥檚 labor market, firms may not be able to afford the retraction of that freedom. Yet for all its apparent ills when it comes to associate retention, remote working has been a boon when it comes to the real estate budgets of large law firms. Through tactics such as hoteling or hot desking, firms have the potential to free up a large amount of real estate.

Under these systems, lawyers would effectively trade their personal offices in exchange for maintaining a hybrid workstyle. Lawyers who are regularly in the building can keep their private workplaces, but those who are only in a few times a week may share their desk with other lawyers. In some cases, these firms would employ a hotel-like system where desks are reserved, offices cleaned between users, and the office itself takes on a concierge-like atmosphere. Sizeable amounts of real estate are thus opened up, either to be cut out permanently or repurposed into the community-focused spaces which can provide the sort of value no lawyer can obtain at home. Thus, so the theory goes, would those desperately needed young associates willingly slip on the golden handcuffs.

It may never be so easy. Law firms are a conservative bunch. On many occasions, a revolution has seemingly been on the horizon only for it to peter out when faced with the opposition of the tried and tested. One merely needs to look towards the oft-forecasted death of the billable hour to see this industry inertia in action. If it is a battle between two visions of the future, then the Reversion faction has the terrain advantage.

Yet like many things, the events that have been sweeping the world since the early days of 2020 may provide just enough pressure to overcome the old regime. While his own personal attempts to push existing models into obsolescence may not have always been successful, the inventor Buckminster Fuller nevertheless provides some interesting food for thought for the Revolution faction: 鈥淵ou never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete

In this final part of a on the legal industry鈥檚 changing approach to real estate, we continue our conversation with Sherry Cushman, Vice Chair and Executive Managing Director of Cushman & Wakefield; and Rebecca Rockey, Head of Economic Analysis & Forecasting in Global Research at Cushman & Wakefield. The series was spurred by data in Cushman & Wakefield鈥檚 recent annual 鈥溾�� and several subsequent reports such as the firm鈥檚 鈥溾�� legal sector benchmark survey, which showed the average law firm is expecting a 20% or more reduction in its real estate footprint over the next couple of years.

We鈥檝e previously discussed how law firms are seeking to downsize their real estate footprint; and examined what the law firm of the future might look like. But we should also consider how a recalculation of staffing is going hand-in-hand with these real estate entrenchments, and how trends toward remote working will heavily influence real estate decisions in the legal industry going forward.

鈥淚f you take your real estate spending level down by two to three percentage points and then figure that you’re going to be spending two to three points more in technology, it鈥檚 generally a wash,鈥� Cushman says. 鈥淪o, it鈥檚 not just the need to invest more in technology that鈥檚 pushing these ideas, although that is a very real consideration for law firm leaders.鈥�

聽鈥淚 think the greatest variable is staff and whether they need to take up an expensive seat in New York City or Washington, D.C. That is some very expensive real estate to be housing people who already prefer to work in their homes.”

Cushman had said that there is a 鈥渇undamental shift and market correction鈥� happening in the legal sector around the use of office space, accelerating a downsizing shift happening in the legal sector even before the pandemic. 鈥淪ome firms were already there,鈥� she says, adding that law firm CFOs and COOs are weighing all the different options that they have right now. 鈥淚n some cases, they’re financially incenting people to stay home, or giving stipends for employees to supply their own office furniture and technology.鈥�

It’s a combination of several different strategies, Cushman explains, and most law firms are somewhere on the path toward the same realization: Remote workers are much less expensive than office workers, which gets to the heart of how remote working is going to have the greatest influence over how law firms configure their future office space.

Rockey notes that the Cushman & Wakefield study predicted that the number of permanent remote workers will approximately double, settling at around 10% of the workforce. However, the bigger piece of the puzzle is those workers who now desire to work at least some days of the week from home, what the study terms 鈥渁gile workers.鈥� It is in this group where law firms could really see dramatic changes and pressures to alter their real estate needs.

Like the permanent remote workers, the Cushman & Wakefield study predicts the agile workforce is going to increase greatly as well. Pre-pandemic, about one-third of the workforce worked from home on occasion; but now, with the lessons of the generally accepted success of remote working firmly in mind, that portion could grow to as much as half of the workforce.

鈥淲e think that around 50% for agile working will become sort of new equilibrium,鈥� Rockey says. 鈥淎nd that means, on any given day, law firms would have far fewer people in the office than they did, pre-pandemic.鈥� Of course, what that looks like in practice is still being sorted 鈥� whether agile means one or two days in the office, or more 鈥� but, interestingly, in a survey Cushman conducted as part of its study, less than 2% of workers said they wanted to come back to the office a full five days a week.

Another question of course, is what type of worker will be returning to the law firm office? 鈥淚 think the greatest variable is staff,鈥� Cushman says, adding that there are many workers within a firm that could just as well continue working from home. In a law firm鈥檚 accounting area, for example, a number of workers are sitting there, running numbers, and working on invoices and bills. 鈥淒o they need to take up an expensive seat in New York City or Washington, D.C.? That is some very expensive real estate to be housing people who already prefer to work in their homes.鈥�

Driving this is the industry metric of employee seat cost, she explains, adding that firms have to weigh the value of housing an equity partner versus an attorney versus a staff member. 鈥淲hat we’re finding is that seat costs for staff, which might run $30,000 to $40,000 a year, will have a big impact on equity partner profitability if they can be eliminated,鈥� she notes. 鈥淪o, there’s a lot of moving around of the numbers.鈥�

For example, Cushman tells of two of her clients, both Am Law 100 firms, that asked her to help them scale back their Washington, D.C. law offices by about 50%. 鈥淭hey came to us and asked, 鈥榃hat changes to our workplace need to happen to make this possible? How many people need to not be here? How many days a week do our attorneys need to come in?鈥�

鈥淔or them, it鈥檚 all about making long-term, permanent real estate decisions.鈥�

Real estate, for example, may see a dramatic impact 鈥� if early movement and solid survey results are any indication. As we discussed in the first part of this series, law firms are seeking to downsize their real estate footprint, spurred on by the global pandemic that forced the industry to rapidly adapt to remote working, technological innovation, and new employee desires for flexibility in their work life.

To be sure, the legal industry felt these pressures before the pandemic, especially the need for a deeper commitment to technology to promote better efficiency and effectiveness. However, the legal industry and its entrenched partnership model was able to put off these necessary changes even as warning bells rang. Now it seems, industry leaders are listening to those bells.

Yet, what does this mean in practice? How are law firms addressing their individual real estate situations in the face of changing workplace pressures? And what options will they most likely pursue? Simply put, will this be a pull-back in office space that evaporates once the good times start rolling, or will it be a dramatic re-thinking of what the law office of the future should look like, strongly influenced by the role technology and remote working will play in this re-design?

鈥淲e are seeing a fundamental shift and market correction in the legal sector in regard to real estate and office space. We were already seeing the sector begin to de-densify and right-size even before the pandemic.鈥�

Sherry Cushman, Vice Chair and Executive Managing Director of Cushman & Wakefield, the global commercial real estate services firm, thinks it鈥檚 the latter, and she has the numbers to back up that position. Indeed, based on the data in Cushman & Wakefield鈥檚 recent annual 鈥溾�� and several subsequent reports such as the firm鈥檚 鈥溾�� legal sector benchmark survey, the overall global office sector is expected to see a 50% growth in vacancy worldwide by mid-2022, with the average law firm anticipating a 20% or more reduction in its real estate footprint.

鈥淲e are seeing a fundamental shift and market correction in the legal sector in regard to real estate and office space,鈥� Cushman says, adding this shift is accelerating a downsizing trend that the legal industry has flirted with for the past decade. 鈥淲e were already seeing the sector begin to de-densify and right-size even before the pandemic.鈥�

In fact, pre-pandemic target ratios were coming in at around 600 square feet per attorney for the average law office 鈥� now it’s under 400, Cushman explains. 鈥淪o, you can see if your competition has gone out there and right-sized to a per attorney ratio of 500 square feet, and your firm is still at 1,000, you have to ask, how is that impacting our profit margin?鈥�

Changes in attitude

What has changed, in Cushman鈥檚 view, is how open-minded law firms have become to what would have been considered radical changes just a few years ago. These include such new workplace game-shifters as shared offices, office space hoteling, greatly expanded and permanent remote working, and of course, expanded use of technology. 鈥淭he pandemic allowed the industry to beta-test ideas that were having difficulty getting traction in a relatively conservative industry 鈥� and it worked,鈥� she says, adding that law firm leaders who had been frustrated by their desire to implement change are now excited. 鈥淥ddly, COVID-19 has completely supported a massive change in the industry, and I think it’s fantastic.鈥�

One interesting possibility that some law firms are looking into is the creation of so-called attorney hubs, which offer concentrated work space, enabled by new technology, for numerous attorneys at different times. 鈥淪ome firms are beta-testing hubs as small as 70-square-foot spaces,鈥� Cushman describes. 鈥淭hey’re building out spec spaces on floors and rotating attorneys in and out, alternating practice groups that come in Tuesdays and Thursdays with those that come in Mondays and Wednesdays.鈥�

The clear advantage to these hubs is that they really spur on the collaboration, mentoring, new technology, and other networking concepts that law firm leaders have wanted to implement but haven鈥檛 yet initiated. 鈥淪o, it’s not about how many hours or days you’re in the office, it’s actually about when you’re in the office and that you’re getting all of those things that you need,鈥� she adds. 鈥淚t’s just rethinking, re-evaluating, and making the office quite frankly, more important than it’s ever been.鈥�

For example, Cushman says she worked with one client 鈥� an AmLaw 100 law firm based in Chicago 鈥� for the past few years, simply tracking the firm鈥檚 office lease expirations and not making any big changes. Then, the pandemic hit, and the law firm was eager to reduce its real estate costs. Cushman says they looked at all 12 of the firm鈥檚 offices, drilling down into every market. What markets had vacancy rates that were rising? What markets had lots and lots of sublet space? What market鈥檚 rents were being driven down and concessions driven up?

Then, her team drilled down into each building situation. Who owns it? Is it a real estate investment trust, a pension fund, a foreign investor, a local owner? What is their appetite for risk? Then, they examined the debt, the equity, the tenant vacancy rate, and pending vacancy rates of the buildings. 鈥淪o, all of a sudden, deals that we didn’t have a year ago are presenting themselves,鈥� Cushman says, adding that landlords were starting to realize that there was going to be a lot of downsizing and a lot of people maybe even closing their offices completely. This realization, and the background work to uncover and leverage it, allowed Cushman & Wakefield to reconfigure this client鈥檚 overall approach to its real estate footprint.

鈥淭he pandemic presented, in a positive way, many opportunities that that were not available because they were just being driven by lease expirations and landlords that weren’t willing to talk to us,鈥� she says, noting that with this particular client, her team is doing deals on five of the law firm鈥檚 12 offices. 鈥淚f COVID hadn’t happened, we wouldn’t have these opportunities.鈥�

Beyond this one example, Cushman says many law firms are making long-term, permanent real estate decisions. 鈥淢any firms are pushing the envelope really far,鈥� she explains. 鈥淲e’re going to see some really neat stuff coming out of the legal sector in regard to office space in the next couple of years that we’ve never seen before.鈥�

In the final blog post in this series, we will look at how a reconsideration of staffing and technology is going hand-in-hand with these real estate entrenchments, and how trends toward remote working and tech innovation will heavily influence real estate decisions.

Fast forward to today, and technology has given us the opportunity to expand our networks, access better tools, and work just about anywhere. While many industries slowly were shifting to this model before the pandemic, the lockdown and quarantines of the past year forced workers out of their routines and offices, requiring them to work wherever they could plug in and access Wi-Fi.

Looking ahead, what does our current reality mean for the conventional workplace, and what value does the office bring to firms? Firms are evaluating what strategies to explore so they can benefit from reduced costs, while also positioning their assets to adapt to change, attract and retain talent, and promote community. There isn鈥檛 a single strategy that will work for every firm, but strong drivers such as humanistic needs, the pace of change, and the power of place should be considered when planning and evaluating the future office.

Creating a place that builds culture

During the last year, attorneys have been adapting to a new working reality and proving they can be productive and effective at home. Meanwhile, firm leadership has been assessing their vacant offices and questioning the future real estate picture. Further, leadership has started asking the big questions: Will attorneys and staff want to come back and if so, why, when, and under what circumstances?

While many believe the answer is yes, many also think there will have to be a new framework of behaviors and expectations for that to happen. Our basic need for human interaction, our desire for new experiences, and our dependence on relationships for emotional, physical, and professional well-being highlight the value of being together. The office isn鈥檛 a place to just get the work done 鈥� it plays a key role in providing an environment that inspires collaboration and enriches culture.

Indeed, firm culture is a critical factor in attracting and retaining top talent 鈥� talent that ultimately delivers on a firm鈥檚 purpose and drives business performance.

Planning insight

The post-pandemic workplace should focus on aspects of the office that will entice people back. Therefore, the office paradigm must shift and transform from a place one has to be to a place one wants to be. Here are some steps to make that happen:

• Spaces should be designed for flexibility and multi-modal behaviors and activities. People will likely come to the office to connect with others, attend meetings, and collaborate with teams. Designing spaces that can adapt to the number and size of meetings will provide flexibility around fluctuating demand and space requirements.
• Amenities that make life easier and enrich workers鈥� experiences also will have an impact on enticing people back to the workplace. The conveniences of a relaxed environment with places to retreat and access to outdoor spaces will be the new expectation.

Capitalizing on technology鈥檚 full potential

The pandemic was a catalyst to embrace technology in new ways. The ability to access documents instantly, connect with others virtually, and collaborate with teams and clients globally were positive shifts and outcomes of 2020. The success of mobile work has workers and their employers questioning the need for physical space. And when technology is coupled with an effective workplace that brings bright minds and people together, it is the combined power of the two that can drive better performance and enrich the office experience.

Planning insight

Technology can challenge traditional ideas around how and why people use spaces, but it can also offer immersive experiences, enhance productivity, and mitigate risk. Here鈥檚 some ideas:

• Offices and meeting rooms will require technology to provide seamless integration and connectivity to support the hybrid workplace. Workers鈥� expectation to be connected, see, and be seen will require embedded technology in both individual and collaborative spaces to support people working in the office and working remotely.
• Using technology to seamlessly reserve spaces will support mobile work strategies. People will want confidence that they will have a place to sit or meet when coming into the office.
• Paper space will make way for people space. Reducing hard copy storage to electronic files supports mobile work, reduces the time to 鈥渢rack down a file,鈥� and diminishes the risk of lost records. Further, underutilized interior spaces can be converted into effective spaces that support the work process, such as meeting spaces, war rooms, and interior offices.

Designing for resilience, not a pandemic

Midway through 2020, I was presenting to the executive leadership team of a global law firm. The leadership team was grappling with how the office design should change to address the COVID-19 pandemic. The managing partner chimed in to challenge the discussion, saying: 鈥淲e need to build a space the attracts our people and our clients to the office. A place that inspires and brings joy. If we have another pandemic, we will go home. Let鈥檚 not design for a pandemic, but for the future 鈥� a resilient and vibrant place.鈥�

The words emboldened the group to think beyond today. Sharing that sentiment has inspired many firms to explore new planning strategies that offer more flexibility for change 鈥� change that is undefined but certain.

Planning insight

Space types should serve a variety of roles, functions, and needs. Universal modules should be a key planning principle, reinforced by modular furniture and technology. Spaces types that are not built for titles but instead for functions, support shifts in business, growth and attrition, planning adjacencies, and the evolution of mobile work. For example:

• Single-size offices typically net more offices per floor and more perimeter offices. The universal office reduces the need and cost to move attorneys due to changes in title or promotion. Further, this strategy reduces the cost of tearing down walls to convert spaces in the future to smaller or larger offices.
• Spaces designed for paper today will be repurposed for people in the future. Planning modules that can address adapting ratios, shifts in mobile working and outsourcing, and the transition to digital are important considerations for the evolving support spaces.

The workplace of tomorrow has the opportunity to enrich experiences, foster innovation, and growth, and strengthen a firm鈥檚 community. Our collective experience during the pandemic has shown that we can free ourselves from old habits and embrace new ways of working that offer us more flexibility and resilience as we face inevitable changes.

Then, along came the pandemic.

In what became a massive beta-testing of remote working, rapid technology adoption, and immediate flexibility, law firms underwent dramatic change over the past year 鈥� indeed, some of the very changes they鈥檝e long considered and long delayed. Now, more firms are looking into how much of this change will become the permanent way they do business going forward, pandemic or no. Among the first changes? Real estate.

鈥淏ased on the polls we鈥檝e done, we are showing that the legal sector will be downsizing its real estate needs on average 10% to 30% 鈥� and in some cases, 40% to 50%,鈥� says Sherry Cushman, Vice Chair and Executive Managing Director of Cushman & Wakefield, the global commercial real estate services firm. 鈥淲e’re already seeing it 鈥� and our clients are already asking for it.鈥�

Cushman says she spends every single day on the phone with global leaders of law firms, COOs, and other firm clients. 鈥淭he legal industry is facing a quandary unlike anything I鈥檝e seen in my career before,鈥� she adds.

Based on the data the firm released in its annual 鈥溾�� and several subsequent reports such as the firm鈥檚 鈥溾�� legal sector benchmark survey, Cushman鈥檚 assessment looks to be spot on. Overall, the study predicted a 50% growth in business office vacancy by mid-2022 worldwide, resulting in a vacancy rate of around 15%. And in the U.S., the numbers are likely to be higher, with the vacancy rate topping out at around 18%, says Rebecca Rockey, Head of Economic Analysis & Forecasting in Global Research at Cushman.

鈥淭he U.S. came in to the COVID era at a 13.1% vacancy,鈥� Rockey explains, adding that when Cushman published its study in mid-2020, peak vacancy was 17.6% for the U.S. 鈥淲e now think it could peak at 17.8% compared to what we thought about six months ago.鈥�

And for law firms, the numbers are even more pronounced. 鈥淵ou can’t compare a law firm to corporations,鈥� Cushman says. 鈥淭hey’re just their own unique grade.鈥� She cites a recent live poll Cushman & Wakefield conducted of 700 U.S. law firms at the end of October, in which 93% of responding firms said they were make changes in their workplace, with 24% describing those changes as 鈥渄rastic.鈥�

Indeed, what鈥檚 happening with law firms is no less than a complete reconfiguring of how they plan to house themselves once they figure out other external factors like how many staffers and how many lawyers want to continue working from home. 鈥淲e think these are really exciting times, and we think there’s going to be massive amounts of restructuring in legal markets all around the globe that will give participants the chance to actually right-size and correct an industry that needed some correction,鈥� Cushman says.

Factors pushing law firms to act

Underscoring this dramatic shift are three factors unique to law firms that leaders are now mulling over, Cushman explains. First, law firms are taking a very close evaluation of their legal staff, because firm leaders are seeing how many of those workers want to keep some elements of remote working. 鈥淔irm leaders are looking at employee surveys and seeing these high percentages, as much as 70% to 80% of staff, saying they would like to continue working from home,鈥� she says, adding that these employees list a variety of reasons, and it鈥檚 not only that staffers will save a lot of money and time by eliminating their daily commute or cut costs on factors like clothing, car insurance, and other items. 鈥淏ut they’re also enjoying working at home now.鈥�

Second, and a huge influence on the first factor, is how many lawyers will return, since it will be that number that dictates staff support requirements. Yet, here too, there doesn鈥檛 seem to be any desire to return to the previous normal. 鈥淪urprisingly, it’s the partners who want to return less than the associates 鈥� but neither want to return to an office five days a week,鈥� Cushman explains, adding that, on average, partners are saying they want to work in the office just two or three days a week, and associates are saying between three and four days a week.

These two factors dovetail directly into the third major driver in all this: The expected increase in needed technology spending to facilitate permanent remote and flexible workers. 鈥淪o, all of a sudden, firm leaders begin looking at these attitudes on returning to the office, and they’re looking at technology costs that in many cases are going to double in the coming years.鈥�

Currently, real estate is the second-largest fixed expense that law firms face, behind salaries. Technology spending is third 鈥� for now, Cushman says. 鈥淏ut profit margins are so tight in the legal sector, that if law firms take a couple of percentage points out of real estate spending and pop it over to the technology area, there’s a very good chance that technology will become number two as a percentage of fixed expenses.鈥�

These concerns over the return (or not) of staff and lawyers to the office and the expected rise in technology costs are driving a re-conceptualizing among law firms in how they will manage their real estate footprint going forward. Already the numbers and the early movers are indicating that dramatic change is afoot.

鈥淚 think that we’re seeing leaders of law firms 鈥� now, after they got over the paranoia, the fear, and the confusion that kept their heads spinning the first six months of the pandemic 鈥� look at this situation as an amazing opportunity,鈥� Cushman says.

This is first in series of blog posts that will examine how law firms are rethinking their real estate and staffing issues and what some are doing to create legal workplaces best suited to the future.

The 鈥� published in January by 成人VR视频 Institute and the Center on Ethics and the Legal Profession at Georgetown University Law Center 鈥� noted that even 鈥渁s 2020 ended, uncertainty persists as to the length of the pandemic-related disruptions and how many months it is likely to be before firms can return to 鈥榥ormal鈥� operations. There is also considerable speculation as to what 鈥榥ormal鈥� operations will be, even in a post-pandemic world.鈥�

Indeed, the report raises the important issue of whether 2020 may in retrospect be seen as an important inflection point for the redesign of the delivery of legal services on a broader scale. And a large part of redesigning this delivery is determining is how much of that work and operations are going be done in the typical office building, the domain of law firms pre-pandemic. Another aspect of the report detailed 2020鈥檚 strong financial performance among large law firms, which was tied to the cost savings firms experienced on the overhead side of the expenditure ledger, especially in cost areas such as offices, marketing and business development, and recruiting.

One area of investment where many expected to see a reduction in spend is occupancy, given the dynamics of the pandemic and rapid rise of remote working. However, in 2020, the average law firm still saw expenditures in this area grow by 0.8% on average, due to the long-term nature of contracts in the real estate space. Discussions with experts around this trend seem to gravitate toward the analogy that 鈥渃hanging the trajectory of occupancy is like turning around the Titanic, slow and frankly, frightening.鈥�

Interestingly, 2020 did mark a six-year low for the average firm鈥檚 growth in this area, as shown above. This suggests that the lucky few firms that were able to negotiate these lease agreements in 2020 settled on the side of reducing spend or investment, if all other firms remained constant or were locked into leases. Steering into our previous Titanic allusion, 2020 occupancy growth looks like it could be the tip of the iceberg in what could be a period in which firms continue to reimagine how office space will be used going forward.

Reinvesting found funds

Further, if 2020 is any clue to the future, it looks like more firms are likely to reduce the significance occupancy holds currently embedded in their cost structure, especially if less lawyers are in those office on a day-to-day basis. This a one of the largest expenses on a law firm鈥檚 balance sheet, making up 25% of the overhead and 12% of the total expenditure on average, and reducing occupancy opens the door for these firms to allocate newly freed resources if they so choose.

And that brings us back to the latest State of the Legal Market report. If we look into where law firms might invest those recovered occupancy costs, it may be difficult to envision because any cost savings from a change will most likely be put into a multitude of different areas. However, as the report shows, even in a year where most discretionary spend was scrutinized or greatly reduced, one overhead category that maintained spend and actually saw the most growth in 2020 was Technology spend.

The average firm grew Technology expenditures on by 3.7% in 2020, while no other expense category grew by more than 1% by year鈥檚 end. Another hint to how crucial this investment is for firms, especially as they transition to a post-pandemic world? Technology has already shown its ability to help streamline remote work, creating greater efficiency and allowing for similar levels of productivity as in the office.

You can download a copy of the here.

Hot desking v. hoteling

Hot desking is the idea that a worker can show up at any office on any day and choose from any available shared workstation space. While this sounds flexible and efficient, early adopters found that, in fact, workers lost up to 30 minutes each day simply finding a workstation and settling in.

To overcome this challenge, many organizations shifted to 鈥渉oteling,鈥� which allows a worker to reserve a workspace in advance for a given period of time. Businesses that embrace hoteling typically also embrace open workspace design. The two together allow the worker to reserve a space with specialized resources that fits their needs for a given time period. If they need quiet time to concentrate, for example, they can reserve a quiet space. If they need special equipment, like a nearby printer or copier, they can reserve a workspace adjacent to that equipment. If they need to meet with colleagues, clients or customers, they can reserve a team room or a public meeting room with appropriate reception and hospitality services.

In any organization with a significant mobile or remote workforce, both hot desking and hoteling are proven to deliver significant financial benefits by reducing the organization鈥檚 real estate investments as well as the capital and operating costs associated with providing an individual with a dedicated desk and workspace.

What technology is required?

Both hot desking and hoteling require a robust, 鈥渟mart working鈥� environment to support these highly mobile work styles. Once a worker arrives at their assigned location, they can鈥檛 spend a lot of time getting themselves connected to the network and voice connections. Ideally, they would have a laptop with Voice Over IP (VOIP) services so they only need to sit down, connect their laptop to the office infrastructure, login, and get to work. However, if they are sitting down to a permanent physical workstation and phone at a desk, then there must be technology in place to automatically configure the workstation with all of their software and preferences at login and a way to automatically activate their personal phone number on the phone at the desk. And reliance on paper files will be out of the question; electronic files will need to be the norm, along with ready access to them at anytime from anywhere.

A corollary challenge is managing the complicated process of finding an available hot desk or reserving a workspace in advance. Fortunately, there are a large number of software applications available that have been working this way for many years and are well proven by organizations. The software would allow a lawyer to use a web or mobile application to reserve a desk or workspace and any other necessary resources. Once the lawyer arrives at the office, they would login and 鈥渞egister,鈥� much as they would register at a hotel. If the lawyer is not familiar with the office layout, the application would offer indoor navigation that would guide the lawyer to his or her assigned location. And, where needed, the application would do the necessary device mapping for a desktop workstation or phone.

In any organization with a significant mobile or remote workforce, both hot desking and hoteling are proven to deliver significant financial benefits by reducing the organization鈥檚 real estate investments as well as the capital and operating costs associated with providing an individual with a dedicated desk and workspace.

What if an individual were to 鈥渉og resources鈥� by booking multiple desks or workspaces simultaneously, or reserving spaces for long periods of time, without actually using them? Hoteling software is smart enough to detect both of these abuses and can be programmed to address them based on rules the organization defines. For example, a reservation could be automatically cancelled two hours after a 鈥渘o show,鈥� or someone could be alerted to multiple abuses so that they could be addressed with the individual.

So, imagine this highly mobile work style, where a lawyer could be working at one of many temporarily assigned workspaces in the office on any given day. How could two colleagues who want to meet face-to-face (with proper social distancing, of course) find each other easily and quickly? Many organizations are solving this challenge with mobile wayfinding software that presents a map of an office space showing a pin for the location of a specific colleague, and providing directions to that location, just like Google Maps.

How far & how fast can a law firm move?

As COVID-19 stay-at-home orders relax and lawyers and staff return to work in their physical offices, often while continuing to work remotely at least part time, many law firms want to offer hot desking or hoteling options as quickly as possible. In order to do so, they will need to consider several key factors, such as:

• • • Does our existing physical office space lend itself to shared workspaces? If not, how costly and time consuming will it be to reconfigure the space?
    • Do enough lawyers have laptops and VOIP devices to make this practical?
    • Can we quickly configure desktop workstations and phones to be used by different people on little or no notice?
    • How reliant are we on paper files, and how quickly can we transition to electronic files?
    • Can we manage hot desking and hoteling reservations manually, or do we need hoteling software to do so? If so, justify the cost, and how quickly can we implement it?

What鈥檚 in the future?

Once the initial COVID-19 pandemic response is behind us, it will be very interesting to observe whether permanent changes will remain in the way law firms view their facilities and technology.

As firms renovate existing spaces or move to new spaces, will they affirmatively embrace the open office, and even smart office approaches that other industries use to enable their mobile workforces? The future will be telling.