Law Firms in Malaysia Face Tight Cashflow and May Downsize

Law firms in Malaysia are facing challenging times. Based on the recently released Bar Council survey results on 5 June 2020 (report available from the Malaysian Bar website to members only), almost half of the law firms replied that they would be downsizing, closing their law practice or ceasing practice. Close to 60% of the law firms responded that they were not intending to hire due to financial issues from the movement control / COVID-19.

I highlight the key points from the Bar Council survey from the perspective of hiring trends moving ahead.

Bar Council Survey Findings

This Bar Council online survey was carried out among law firm owners with 844 responses collected. The survey was done from 10 to 20 April 2020. The survey was meant to gather responses from sole proprietors or partners in West Malaysia. This time period would have been deep in the midst of the movement control restrictions and where law firms had not opened up yet. I mention that as that may have resulted in a slightly more pessimistic outlook.

Three key findings I want to mention.

Closing, Downsizing or Continuing

First, the respondents set out whether they would be closing, downsizing or continuing with their law firm. I note that more than one answer could be provided so the raw percentages below are not meant to add up to 100%.

The above data is still useful. I totalled up all the responses (1077) and crunched my own estimated percentages. About 49.8%, or just about half, of the responses pointed to closing their practice or downsizing their practice. 42.7% pointed to maintaining their current practice.

  • Ceasing and closing practice = 16.8%
  • Downsizing practice = 32.9%
  • Merging practice = 7.5%
  • Not making changes to their practice = 42.7%

Recruitment Moving Ahead

Second, the respondents answered whether they intended to recruit lawyers or pupils after the lifting of the movement control. Again, more than one answer could be provided so the raw percentages below are not meant to add up to 100%.

I totalled up all the responses (917) and crunched my own estimated percentages. About 56% responded specifically that they would not be hiring due to financial issues arising from the movement control or COVID-19 generally. There were paltry percentages for the intention to hire lawyers (3%) and pupils in chambers (2%).

Sustaining Based on Current Reserves

Third, respondents were asked about their current reserves. How I interpret the question and the results is essentially how much rolling buffer do the law firms have. So for example, assuming no revenue, how many months do their reserves sustain their overheads?

31% of the respondents said they would have one month’s reserve. That is a very high number where the law firm could essentially only survive from month to month. Close to 50% of the respondents had reserves of two to three months. This also shows the impact of the movement control which would have eaten so much into those months’ of reserves.

The above survey results, as well as the other findings in the report, show that law firms are very much having to focus on survival. They have to manage their reserves, their overheads, and trying to cut costs. So the law firm will take a cautious view on taking on more headcount and costs.

The Challenging Legal Job Market

Beyond the survey results, I also set out my observations of the challenging legal job market. This echoes my thoughts I posted two months ago on the challenges to the Malaysian legal job market. In particular, I think pupils having just completed their pupillage are in a difficult situation.

  1. For graduates, I think Malaysian firms will be cutting down on available pupillage positions and reviewing their honorarium pay. The Bar Council survey results appear to already show less appetite for taking on more pupils.
  2. The escalating competition for pupillage pay will stagnate for a while. Before this, the top pupillage pay in Kuala Lumpur was more than many first year associate salaries.
  3. For foreign university graduates, it will be tougher to secure training contracts and employment overseas. I saw this during the Global Financial Crisis of 2008. More foreign graduates returned to Malaysia for pupillage and for jobs. This adds pressure to the pool of applicants versus positions available.
  4. There will still be places for the brightest graduates and those who do well at interviews.
  5. It will be an employer market. Employers can pick and choose the best pupil candidates. Firms will also stagger when the pupil joins the firm. This is to allow for more controlled expenses while waiting for the cashflow to improve.
  6. There will be less available positions to retain pupils. There is a general sense of a hiring freeze now as employers wait and see for the next few months.
  7. For a pupil having just completed pupillage and not retained by the firm, this applicant will find it more difficult to get employment. This is aggravated due to the long period between filing the Call papers and the eventual Call ceremony. Anecdotal evidence seems to show a more than 6-month gap now (and growing) between filing the Call papers and the eventual Call. This pupil will not be a qualified lawyer and cannot be hired as a legal associate. The pupil will be in no-man’s land, neither a full-fledged pupil nor a lawyer.
  8. In relation to legal associates or staff, there is also a lot of pressure on law firms to start salary cuts. Many law firms have already trimmed their expenses. Some firms have not taken profit distributions. Some firms have temporarily frozen salary increments. Next, the firms may have to implement salary cuts. Small, medium and larger law firms in Kuala Lumpur have already done that or would be looking at that. The Bar Council report noted that there are law firms that have taken steps to restructure staff salaries, while some firms intend to retrench or not to confirm employees on probation.
  9. On the other hand, the Bar Council report also notes that there are law firm owners who do not intend to make any drastic changes to their firms. The firms value their employees and will try to make ends meet, have sufficient reserves, will reduce expenses and overheads, and will use their savings.

 

One thought on “Law Firms in Malaysia Face Tight Cashflow and May Downsize

  1. Avatar Julian Ding 6 June, 2020 / 3:40 pm

    What the pandemic and this survey shows that it is now more so than ever, that the profession needs to be modernised into the 21st century. The Group rules should be amended to make it easier for small firms to join together and share and better manage their costs, LLPs should be permitted so law firms can benefit from the structure and the tax rules. Allow local law firms to merge with international firms. All of this would help the future members of the profession who right now can’t find pupillage or even jobs.

    If the Bar really looked at the wellbeing of the profession than it should immediately implement these changes to give firms a fighting chance for surviving.

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