Once regarded as secure for life, partners in Britain's leading law firms are now being presented with a stark choice: prove your worth or leave. Almost 2,000 of them could go.

Senior equity partners, who earned an average of £1.1 million in the top ten firms last year, are being told that they must accept a reduced share of profits or leave. Younger partners, promoted during the boom of recent years, are also being forced out.

Up to 10 to 15 per cent of the 11,726 partners in the top 100 firms could lose their jobs this year.

The firms are seeking specialist legal advice themselves on restructuring partnership ranks in the face of a sharp decline in revenues this year. According to Richard Linsell, a specialist in professional partnerships with Addleshaw Goddard, the law firm, lawyers are following the lead of the big accounting firms in targeting underperforming partners.

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The move is a radical departure from the reaction to previous downturns, when the bulk of job losses in big law firms fell on junior solicitors, known as associates. “Partners were deemed to be untouchable in those days,” Dominique Graham, director of Graham Gill, a legal consultancy, said. “This time, it's the partners going first.”

The cuts have come as a shock to partners, whose earnings soared to record levels in recent years. A typical partner facing the axe is likely to specialise in an area such as finance or property, the practice areas most heavily affected by the credit crunch. They are likely to bring in fees of about £500,000 - useful when work is plentiful but far short of the £3 million to £5 million billed each year by the City's stars - and earn about £250,000. To keep them on in a downturn “simply doesn't make sense”, Mr Linsell said.

Many of those partners are in their forties, with young children and substantial mortgages and with pension funds that have fallen dramatically in the past year. “People are taking it very badly, and understandably so,” Ms Graham said. “They know the recession is happening, but they can't believe it's happening to them.”

Ejected partners could struggle to find a similar position in another firm. “The [legal recruitment] market is just dead,” Mr Linsell said. “When they're shown the door, the chances of finding alternative positions are very low.”

Ms Graham said that firms had learnt their lesson after wholesale cuts of junior lawyers during the last recession had left them with a shortage of capable specialists coming up through the ranks when business picked up again.

However, there is also an element of expediency to the move. Shedding partners is quicker and easier than shedding associates, Mr Linsell said. As salaried employees, associates are protected by employment laws, while partners, legally classified as owners of the firm, can usually be removed through a vote of the partnership or a designated committee.

Equity partners who have been forced out can typically expect to receive the equivalent of a year's share of profits as compensation, Mr Linsell said but since the financial crisis he had seen firms become less generous, offering nine or ten months' share to full equity partners and as little as three months' share to junior equity or “fixed share” partners, who receive a set amount similar to a salary.

In addition to restructuring their partnerships, law firms are taking a number of other measures to deal with declining revenues as a result of the financial crisis. Many have stopped promoting new partners, barred equity partners from withdrawing their regular share of profits and even called for partners to inject fresh capital. According to Ms Graham, equity partners across the City could see their earnings fall by as much as a third this year.

Mr Linsell expects restructurings to lead to fundamental change in law firms' business model. He said: “My belief is that the legal profession will come out in very different shape.”

Market verdict

£1.1m
Average share of profit for equity partners in the City's top ten law firms

£2.9m
Average annual fee income generated by each of those equity partners

£614,000
Average share of profit for an equity partner in one of the City's second-tier firms

£1.8m
Average annual fees generated by those equity partners in second-tier firms

Source: PricewaterhouseCoopers

alex.spence@thetimes.co.uk

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