Expectations of a prolonged economic slump combined with a renewed assault on
lawyers’ fees means that top City law firms are bracing themselves for a
painful 2009.
After enjoying several record-breaking years, City lawyers are gearing up for
a fall in revenue and profits as well as the ugly prospect of mass
redundancies in a traditionally safe and recession-proof sector.
A drop in general corporate activity presents the simplest and most
fundamental problem for City law firms, which grew fat on a steady stream of
private equity, mergers and acquisitions and financing business. Not only is
this kind of work the most profitable for law firms but it also feeds
complementary work to other practice areas such as competition, tax,
employment and pensions that will all suffer from a drop in deals in the
next 12 months.
With firms across the board facing weaker demand in 2009, City lawyers and
their advisers are united in pessimism with Peter Martyr, chief executive of
Norton Rose, summarising that “everyone is anticipating next year will be
tough”.
Aware that the good times would not last forever, City law firms have
positioned themselves to weather the downturn but their efforts may not
provide enough insulation against the current climate.
Tony Williams, a former managing partner of Clifford Chance and head of law
firm consultancy Jomati, warns that two important hedges that City law firms
traditionally rely on in a downturn may prove ineffective next year. The
first is their network of international offices, some of which have remained
busy in 2008 but are now succumbing to the global downturn after early hopes
that some economies in the Middle East and Asia may be immune to recession
proved unrealistic.
Guy Morton, joint senior partner of Freshfields Bruckhaus Deringer, said: “Law
firms have seen some stabilisation from international networks but not as
much as everyone had hoped and we are now seeing the downturn spread across
the globe.”
The other traditional hedge that may provide less insulation than hoped is law
firms’ reliance on substituting corporate work with restructuring and
insolvency mandates during a downturn. Although substantial mandates like
Lehman Brothers will prove lucrative for some law firms, Mr Williams said a
dearth of complex insolvencies and the trend for quicker and simpler
pre-packaged administrations - that require much less legal advice - will
hit law firms in 2009. “To generate meaningful fees law firms need to work
on big, complex insolvencies and restructurings with lots of follow-on
litigation which we are not seeing many of at the moment.”
“The current insolvency and restructuring market is a help but it’s not an
effective hedge for large firms,” Mr Williams added.
John Young, senior partner at Lovells, said his firm’s broad-based spread of
practice areas meant that other practices provided some buffering for
falling corporate activity but did not make up the shortfall.
Mr Williams said another area that may prove less of a buffer than hoped is
litigation. Despite predictions from Lord Falconer, the former Lord
Chancellor, and others that the collapse of Lehman Brothers would lead to an
explosion in litigation, court lists remain thin. Any such litigation is
likely to be several years down the line and so will offer little immediate
comfort for struggling law firms.
In addition, recent attempts by Lehman Brothers creditors to circumvent the
administration process with court action have been comprehensively
dismissed, cutting off a potential supply of work for law firms before it
could develop.
Next year will be especially difficult for City law firms because as well as
dealing with less demand for their services they face the additional problem
that what demand there is will drive a harder bargain on price.
Nick Carter-Pegg, head of the professional practices group at accountants BDO,
highlights pressure on lawyers’ fees as the chief issue for City firms next
year.
The main battleground is likely to be over firms’ preference for hourly fees,
which accumulate uncapped as a job goes on, removing the risk of
undercharging for the firm but leaving the client with little certainty over
the final bill. Mr Carter-Pegg said businesses are increasingly demanding
alternative - and better value - fee structures from their lawyers.
ITV, the media and television group, passed what many consider a milestone in
November when it became the first FTSE100 company to say it would only
instruct law firms that are prepared to abolish hourly fees and use
different methods of billing. Slaughter and May and Lovells were among the
firms to agree to ITV’s demand, showing that the City’s elite acknowledge
the new pricing pressures. Both Mr Carter-Pegg and Mr Williams said that
businesses will use the economic downturn as an opportunity to push for
better value from their legal advisers.
With weaker demand for legal services but no significant reduction in the
number of legal mouths to feed, competition for work is likely to mean firms
chopping prices. Bryan Hughes, chief executive-elect at Eversheds, said:
“Many clients will be under intense pressure to cut costs and will look to
their lawyers to share the pain. We are always prepared to look at
alternative methods of billing.”
New accounting rules that come into effect in 2009 requiring companies to
split out fees paid to lawyers and other advisers on M&A deals as
separate entries in their accounts will further add to pressure on fees,
lawyers warn.
The second half of next year could prove particularly difficult for law firms
once the run of initial insolvency and related work dries up. Mr Morton
said: “So far we have seen firms pick up insolvency and other fire fighting
work which provides some compensation for a lull in commercial and deal
work. But based on past recessions there is likely to be a time lag between
when the worst of the damage is over and deal activity picks up again, which
means a very slow few months later on this year.”
City firms acknowledge that the combination of lower fees and slower demand
makes job losses inevitable. Around 1,000 legal positions were cut in London
last year but Mr Williams and others believe many more will be lost in 2009.
The largest firms, which have so far avoided mass redundancies, are likely to
be under the greatest pressure. This is because they cling to the legal
professions’ traditional claim that mass redundancies are hasty short-term
solutions that are ultimately bad for business because they mean firms risk
being caught without staff and unable to recruit when the markets turn. Mr
Morton said: ”We will need to look very carefully at staff quality next
year. It’s hugely important not to be short termist: we want to keep our
best talent and continue to bring in new talent.”
Some firms, especially those which remember the difficulties in hiring real
estate lawyers after the end of the last property recession, may brave the
rut but Mr Carter-Pegg said more cuts are inevitable with senior associates
at the most risk.
Mr Hughes, who was involved in Eversheds’ decision to cut around 80 staff last
year, expects rival firms to follow suit. “It’s a simple equation: too many
people and too little work. Some firms have traditionally been prepared to
wait until things bounce back but the current economic climate is
unprecedented territory”.
Like any other business, law firms will also need to think about their banking
arrangements in the year ahead. Colin Ives, a professional services partner
at BDO, said law firm finances “will be stretched as never before in 2009”.
“Law firms may have had an upper hand in their dealings with banks in the past
but the criteria for lending has dramatically changed in the credit crunch.
Firms should not assume that last minute increases in overdrafts and other
facilities will be as readily accessible as they have been in recent years.”
According to BDO, January 2009 will be a particularly tricky time for law
firms’ cash flow because January typically sees firms paying partners’
income tax and firm VAT contributions for the previous year as well
quarterly office rents. This is usually combined with slower receipts of
fees from clients over the December break.
Despite the grim outlook, lawyers point out that there are some encouraging
signs for next year. Governments around the world have made clear that some
businesses are too big to fail and these, typically huge and complex
companies, will provide a steady stream of work as they continue to
restructure and return to private ownership.
Mr Young remarks that in any downturn there will be some people who will use
falling prices as an opportunity to pounce and 2009 could see some
opportunistic M&A.
David Barnes, head of corporate at Linklaters, said there would be other
pockets of work in 2009 including advising those retailers that survive the
next few months which are likely to consolidate or divest poor performing
assets to shape up for the long term. Mr Barnes also pointed to a gradual
return of interest in foreign assets from Japan, as highlighted by Nomura’s
purchase of parts of Lehman Brothers, which he believes may continue into
2009.
Mr Morton said that regulatory work is a permanent hedge that law firms are
guaranteed to be able to rely on next year. With regulators and law
enforcement agencies across the word firing on all cylinders and preparing
for a busy 2009, lawyers will have another steady stream of work.
Neil Gerrard, head of regulation at DLA Piper, predicts that lawyers will be
busy helping clients comply with existing rules and regulations as well as
interpreting new requirements that emerge from the credit crisis. “Just as
they did following Enron and Worldcom, Governments and regulators are likely
to bring in new rules after the credit crunch.”
Since the US remains the world’s largest and most aggressively regulated
economy, focus is likely to fall there. Commenting on the alleged Bernard
Madoff fraud earlier this week, Paul Kanjorski, a Pennsylvania democratic
Congressman, referred to plans for "the most substantial rewrite"
of laws governing the US financial markets since the Great Depression.
Mr Morton said: “There is going to be a big increase in regulatory and
advisory work once the new US administration takes office and senior posts
at regulators are filled. Business will be turning to lawyers as it begins
to react to the new regulatory landscape.”
Just glad I managed to stay within the profession for 25 years before this all happened.I cannot now even obtain a job issuing parking tickets.Nobody wants to employ redundant lawyers.
Bert, London,
My daughter a solicitor tells me that the vast majority of those newly qualified as solictors with the large City firms are not being kept on by their sponsoring firms. With massive student loans etc there will be mass panic amongst the NQs. Their only hope is the abolition of the 48 hours opt out.
ian, Maidstone,