In 2021, corporations and law firms alike grappled with yet another year of disruption and unpredictability caused by economic volatility, a lingering global pandemic, increased regulation, and inequality within the workforce. To help our clients prepare for whatever 2022 may have in store, Lighthouse CEO Brian McManus welcomed economic forecaster and former CNBC chief economist and Squawk Box co-host Marci Rossell for a lively discussion centered around these current global macroeconomic trends, with a focus on their effect on the legal industry.
Their conversation was wide-ranging and informative, touching on impacts, causes, and forecasts related to inflation, global workforce shortages, inequality in the workplace, technology adoption, and increased regulatory and data privacy restrictions. The key takeaways from this discussion are outlined below.
As of January 2022, the inflation rate was hovering around 7% in the United States (US), and around 5% in the European Union (EU). These are the highest inflation rates both countries have seen in decades. Rossell explained that one of the major contributing factors for this increase is the speed at which the overall economy recovered from the abrupt halt in economic activity in the spring of 2020 due to the COVID-19 pandemic. The sharp economic recovery drove a surge in demand for services and goods, at a time when supply around the world was at an all-time low due to pandemic-related shutdowns. This tension led to the current sustained inflation rates we’re seeing today, and those rates can be expected to remain high for the foreseeable future in markets where production is not expected to meet demand any time soon (such as the energy and oil industries).
Within the legal industry, specifically, law firms and organizations have not only been impacted by the typical “cost of goods” inflation described above – they have also been impacted by inflation related to labor shortages and rising wages, as well as costs related to regulation and compliance.
“The Great Resignation” and Its Impact on the Legal Industry
Over the last two years, droves of workers have switched employers, changed careers, or left the workforce all together, in what pundits and economists have deemed, “The Great Resignation.” Rossell explained that this global phenomenon may have roots in the financial crises of 2008 – 2009, when the economy contracted dramatically, leaving millennials struggling to enter a workforce plagued by an unemployment rate that had soared into the double digits. In the wake of this recession and for years afterward, the balance of power between employers and employees was weighted heavily in favor of employers, with overqualified workers applying to the same jobs, giving employers their pick of quality candidates. Now, this same generation of millennials have been confronted with a pandemic that has caused millions of people to suddenly sever their connections to jobs, employers, and/or geography. Many of these workers may not have felt very connected to where they worked or lived in the first place, but stayed because of their previous experience in a job market that was heavily influenced by the last recession. The pandemic suddenly forced this generation of workers into a situation that ultimately enabled them to make different career choices. And we are certainly seeing them making those choices.
As Rossell noted, in addition to this trend among the millennial generation, the pandemic also escalated early retirements for an older generation, while an overall decrease in population growth has led to 400,000 fewer young people entering the labor force every year. These three factors are a perfect labor-shortage storm, with fewer experienced workers, fewer young people entering the labor market, and a generation of mid-career millennials reevaluating their careers and/or employers.
McManus pointed out that labor shortage has also had a significant effect on the legal industry generally, and the ediscovery industry specifically. eDiscovery is a niche industry, which makes it harder to find and retain experienced talent in general. But over the last twelve months, the tighter labor market has significantly exacerbated those issues. There is now a shortage of talent within ediscovery and the cost of retaining valuable talent has sharply increased over the last nine months, with experienced employees being offered 20% to 40% more in compensation.
This trend also affects the broader legal industry. Attrition of associates at law firms was at an unprecedented level in 2021 and the cost of retaining associates skyrocketed. For example, law firm associate compensation grew 11% in November of 2021, year over year, according to a state of the legal market report from the Thomson Reuters Institute. This trend can be expected to continue over the next few years due to the economic factors at play.
To combat the worker shortage, McManus warned that employers should expect to not only offer higher compensation, but also include benefits like flexible work arrangements, in order to recruit and retain talented employees. Even prior to the pandemic, Rossell noted, studies showed that flexible work arrangement benefits were worth about 8% of a salary to younger employees. This trend is expected to sustain well into the future, as housing market trends indicate that 30-somethings are moving to larger homes away from large corporate offices and cities.
Diversity, Equity, and Inclusion in the Workforce
There has been a significant emphasis placed on diversity, equity, and inclusion (DE&I) over the past few years across many markets, including the legal industry. Rossell provided a historical perspective, explaining that thirty years ago the consensus from economists was that the labor market was rational and profit-maximizing and thus, discrimination in the labor force could not exist. The theory was that for-profit companies would always be incentivized to hire the best individual for the job, regardless of gender, race, ethnicity, sexual orientation, etc. But in 2004, a groundbreaking economic study on race in the labor market found that people with white-sounding names were 50% more likely to get a call back from an HR professional. This study was the beginning of a sea-change in economics, where organizations slowly realized the economic need for, and importance of, DE&I. In effect, organizations began to slowly understand that there was an economic cost to not hiring the best candidates, and that focusing on DE&I increases profitability, productivity, and growth.
This sea-change is represented across the globe. European countries were initially on the forefront of this movement, as evidenced by the 2003 emphasis in Norway to have gender equity represented on corporate boards within the country. The US is now moving even further in that direction. Last year, Nasdaq proposed new board diversity rules and disclosure guidance, including that listed companies should have at least one board member who identifies as a woman, as well as one board member who self-identifies as an underrepresented minority or LGBTQ+.
As McManus pointed out, this trend is also represented across the legal industry. There is a continued expectation for more diversity, equity, and inclusion within organizations, law firms, and legal technology supply vendors. Clients want to see diversity, equity, and inclusion represented in the teams they work with on a daily basis. Additionally, the next generation of talented employees is also demanding an equitable environment in which to work. Thus, legal and ediscovery employers should expect that going forward, they will need to track, measure, and demonstrate an inclusive, equitable, and diverse environment in order to attract and retain the best workers.
As Rossell pointed out: “(DE&I) matters to the next generation. As talent becomes scarcer and the balance of power shifts away from employers to employees, [the next generation of workers] is going to demand not only a flexible workforce but a diverse and inclusive environment to work in.”
As DE&I programs advance, ediscovery and legal teams will see how diverse hiring contributes to greater innovation and success.
AI and Its Role in the Legal Industry
Rossell also provided a historical view of technology innovation and its effect on worldwide economies. She noted that artificial Intelligence (AI) technology is the next step in a 200-year-old process that began with the industrial revolution – when advances in machine automation allowed simple machines to perform manufacturing related processes, enabling humans to migrate towards more service-related work. This has now evolved into machines that can now perform some of the work in the service sector, thanks to advancements in AI technology.
McManus noted that within the legal industry, lawyers (who are trained to be risk-averse) have traditionally been much slower to adopt this emerging technology. However, the legal industry is also quickly becoming submerged in “big data,” and AI is one of the most effective tools to combat the labor shortages and increased costs that exacerbate the problems caused by massive data volumes. Nowhere is this more evident than in the document review process performed during ediscovery.
“The industry still follows a traditional approach [to document review] with large groups of lawyers reviewing massive volumes of text and that approach is just untenable,” McManus said.
The impracticality of that traditional approach is not only due to the increased volume and complexity of data, but also due to labor shortages and increased labor costs. Advancements in AI give newer legal technology tools the capability to help automate and expedite the document review process. This should lead to AI adoption at a much faster pace than we’ve traditionally seen in the legal industry, McManus noted.
The Global Regulatory Landscape, Anti-Trust Activity, and What to Look for in the Coming Years
Rossell also provided an insightful overview of the dynamic and shifting regulatory landscape from an economist’s perspective. Increased governmental regulation is raising costs in almost every industry and is one of the driving forces behind higher inflation rates. In the United States, the increase in government regulation may be due to the fact that the government’s governing functions have been slowly shifting from the legislative branch to the executive branch. In turn, this shift means that every four years, companies may deal with a complete shift in the regulatory landscape depending on which political party wins the presidential office. These abrupt swings make compliance very costly and put pressure on smaller organizations. Often the only companies that can survive this type of volatility are those big enough to support a department solely dedicated to compliance. Thus, in some ways, increased government regulation is driving the consolidation of companies.
At the same time, we are seeing a shift in antitrust policy from an economics perspective. Whereas previously, anti-competition policy was centered around whether consolidation would harm consumers, we’re now seeing a shift to assessing a broader range of harm. Prior to this shift, a merger would be blocked if it would cause higher prices for consumers (i.e., if the merger would cause consumers harm by giving them less choices and therefore raise consumer prices). Now, mergers are blocked for a much broader range of issues that are not just centered solely around consumers, but around society as a whole. For example, a merger might now be blocked if it would be harmful to the environment, to workers, would cause a decline in future competition, etc. This more aggressive governmental regulation worldwide is expected to continue in the coming years. In short, expect anti-competition scrutiny to continue to be broad and aggressive, regardless of changes in political parties and offices.
The Future of the Global Data Privacy Landscape
Finally, McManus provided a helpful overview of recent changes to the data privacy landscape, and what to expect in the 2022. Another area where government regulation is expected to continue to increase globally is around data privacy rights and protections for consumers. The EU’s GDPR legislation in 2018 paved the way for data privacy rights, providing a template for governments on how to regulate and protect consumer data privacy. Within a few years, California followed suit, as did a plethora of other governments around the world. This trend is only expected to continue as we move into an increasingly digital world.
In the US in 2021 alone, two more states passed comprehensive GDPR-like laws (Virigina and Colorado), while at least 25 other states introduced or had data privacy laws somewhere within the state legislative consideration process. And the US federal government also looks to be increasingly active in this area – with the U.S. House Energy and Commerce Committee voting to give the Federal Trade Commission $1 billion to set up a data privacy bureau. Even China passed a GDPR-like law in 2021, the Personal Information Protection Law, which included not only the risk of huge fines for non-compliance, but also the risk of companies being black-listed by the Chinese government.
This focus on data privacy regulation will certainly increase costs for businesses in the coming years, as companies work to stay compliant with a patchwork of global and local data privacy laws and regulations.