Building bridges to the future

“You’d have to be an idiot not to make money in this market,” said one leading property lawyer to me at lunch the other day. “I just wonder when it’s all going to come crashing down. And what happens to those firms that aren’t making much money now?”

Perversely, in the longer term, the boom in property may have had an unproductive effect on many law firm property practices. The strategy and direction of many firms has, to an extent, been blurred by the buoyancy of the market.

The last recession caused most firms to cut back on property. Instinctively, they looked to reduce their assistants, hacking numbers off and discouraging qualification into the property department. For many of them, this was precisely the wrong thing to do. In failing to deal with second-rate, deadwood partners, all those firms were actually doing was making their property services more expensive – either to the firm or to clients – and less efficient. Lockstep meant that many firms were saddled with underperforming, expensive lawyers at the top. In many cases, exactly those people were the least adaptable to change, either in the technology required to deliver the legal service more effectively, or in the changes needed in client service.

When the property market recovered, those firms breathed a huge sigh of relief as activity picked up. Making a virtue out of necessity, and by acting in accordance with many clients, particularly those on the development side, many firms began marketing a åpartner-led’ service (although that is not to say that all firms with a partner-led service suffer from those problems). Having said that, it wasn’t all roses. Price pressure in property is still pretty fierce in some cases, particularly on the large-scale contracts offered by the major institutions. More than one head of property in a major firm will admit that much of the basic work done for these trophy clients is not very profitable.

But recruitment, certainly of good individuals, became difficult. The larger firms, after seeing the property market take off – particularly the large projects which required a well-leveraged practice – made a grab for many of the good young assistants, and began qualifying them into property again. Smaller firms, constrained by fewer trainees, could not keep up in growth terms. Lateral hires into property at qualified level, particularly at the senior end, became difficult for the smaller firms, which were unable to compete with their larger brethren in the quality of work, partnership prospects or salaries.

In some cases, structural change has been put off because firms are just too busy: gearing has not been addressed; in some cases, training needs have not been met; diversification of the client base and simple marketing have been ignored, sacrificed to the great god “Don’t Need To”.

But firms that have failed to strategise will be regretting it come the next property recession. And sooner or later, there will be one. When it comes, firms with too many partners providing a service which can be done cheaper and more efficiently by smaller competitors with better speed of response will go to the wall.

And, frankly, it is about time. Talking to clients confirms this. They cite complacency, inefficiency, poor service, a poor understanding of clients and sheer bloody-mindedness on the part of some law firms, as the main reasons why they would go elsewhere.

Law firms need to address the strategy issue now. In the words of one development client: “You can’t stand still in property. If you do, you contract.” His experience was of a law firm failing to respond to the move of a key partner to another firm, and of the former firm’s state of inertia when it happened.

A partner in one of the major City firms confides: “Sorting out underperforming partners was something that had to be done, but we’ve done it, and it’s a different world around here now.”

Getting rid of people is never easy, particularly when they are partners, but many firms are hiding from the issue under the cover of the steady amount of work. In fact, getting rid of people that the whole practice recognises as underperformers can improve morale further down, releasing a partnership bottleneck and demonstrating to fee-earners that management has the stomach to act.

Another unfortunate aspect of this is firms hanging on to unprofitable or unsuitable clients, thinking that turning away any work is a bad thing. In fact, a failure to take the axe to the client base and to target marketing efforts on creating a diverse base of fee-paying clients may give rise to problems for some firms come the downturn (one leading property lawyer confides that a well-known developer has still not paid a bill dating back five years). DJ Freeman, for instance, is an excellent example of a large property practice which had a very developer-heavy practice before the last recession, but which has since added funds and projects to its portfolio, helping to make it much more recession-proof.

The need to strategise is not confined to the smaller firms. The quantum leap of a handful of major firms – Clifford Chance, Freshfields Bruckhaus Deringer and Lovells – to merge with German practices has at last given UK firms a serious critical mass in property in Europe. Linklaters‘ alliance also gives it some punch in key European jurisdictions, although in a slightly different way.

This has thrown the gauntlet down to the rest of the UK firms, pretenders to international practice such as Ashurst Morris Crisp, Herbert Smith and Simmons & Simmons (not to mention CMS Cameron McKenna’s much-vaunted Eastern European practice), as well as the big commercial conveyancing firms whose practices, to a lesser extent, mirror some of the mega-firms.

These practices have been challenged, and the key will be whether they can hold on to their best staff. Clifford Chance’s raids into CMS Cameron McKenna and Norton Rose are awkward in PR terms for the pillaged, and have an effect in the client market. As one client said of Jonathan Solomon’s move from Norton Rose: “I wasn’t surprised, but I’m sad, because change is difficult to manage. Norton Rose’s property section didn’t really have the breadth that I, as a client, liked. If Jonathan was away, I struggled. I’m not surprised he went to a firm with a major property practice.”

It may be that there will be a continuing degree of flight to safer havens from the large domestic practices. Those taking flight may well reason that when the cruel wind of recession blows, perhaps an international practice will be a much more secure place to be.

In fact, the global property practice is somewhat ahead of client demand, at least in the UK, but there is little doubt that a more internationally diversified client base may offer regional peaks and troughs. After all, Europe hardly went into recession when Asia crashed. Perhaps if Europe dips, the Asian practices of the mega-firms will help their UK counterparts to ride it out.

Property legal services already has several tiers, with different firms able to offer quite different things to clients. The danger for many in property’s middle ground – and the smaller, generalist law firms look most vulnerable in that regard – is that another recession will further widen and deepen the divides between the groupings. This will mean that whoever doesn’t go out of business in the next crash will almost certainly enter a period of terminal decline, while the big firms, and the healthy middle-tier firms – those which take time now to think about their futures – will prosper.