No to meltdown: firms predict revival in 18 months and commit to traditional associate gearing model
With just five weeks to go until the end of the financial year, major City law firms are preparing their staff for financials at 2003 levels, but are uniformly predicting a recovery in 18 months.
The Lawyer interviewed managing and senior partners from leading City firms. All are envisaging dips in revenues and/or profits this year and next, particularly as costs continue to rise, despite pay freezes. However, all predict a medium-term recovery, suggesting that business confidence is higher than the raft of redundancies would initially suggest.
“It still seems as though we have a long way to go before we see a return to normal levels of transactional activity, and of course we don’t know what ‘normality’ will look like,” saidFreshfields Bruckhaus Deringer chief executive Ted Burke. “But there are enough positive signs out there to suggest that we have at least seen the end of the beginning.”
“It became rather cool to be apocalyptic,” said Denton Wilde Sapte chief executive Howard Morris. “Everyone’s terrified of being ridiculed for talking about green shoots. Theuniverse has shrunk, but within that universe there are some bright stars.”
Nabarro senior partner Simon Johnston said: “Inherently I’m an optimist. I don’t think it will be that significant a change. Yes, there is a new morality in the City, and that will run across into law firms. It will pretty much be the same shape of the industry with a little bit more realism.
“I wouldn’t say our shape is perfect right now, but with a little bit of an increase in activity we’d be back up to 100 per cent.”
According to The Lawyer UK 200 Annual Report 2008, the partner-associate ratio across the top 20 is only slightly higher than five years ago (see chart). There had been speculation that this gearing model would collapse, but all the major law firms are still wedded to the pyramid structure, which shores up associate career opportunities.
“We’re a little puzzled by the intensity of discussion over leverage ratio,” said Lovells senior partner John Young. “A lot of it comes from the US and is based on this concept of law firms abusing the system and that you throw jobs to vast amounts of associates. It doesn’t strike me that clients are pushing against it.”
One senior partner at a City firm said: “In the old world there were loads of young lawyers producing boring bits of paper that made us loads of profit. We grossly overcharged for associates and we grossly undercharged for senior time. The struggle is to get through this period of low gearing, and to do that you look at senior resource. The partners working hard now is where the real value of the firm is. The partners not workingtoo hard can be replaced by juniors – that’s the brutal truth.”
Magic circle firms’ deal factories have seen a disproportionate number of redundancies, with clients no longer requiring high-level and high-volume work.
A senior magic circle partner told The Lawyer: “Most of the magic circle firms have been reducing the number of associates anyway. To the extent that we’re also reducing partner numbers, that’s really dealt with the gearing issue. Clients want senior advisers on these deals so less associates are required. I think the ratio is likely to go from 4.5:1 to 4:1 in banking for the short term, but it won’t change much more than that.”
Herbert Smith managing partner David Willis said: “There’s a feeling of spring around.”
Slightly off-topic, but what bugs me most is that lawyers and journalists alike seem to not understand the distinction between “less” and “fewer”. There should be no recovery for a lawyer who can’t explain it.
I agree, but I fear we may be fighting a losing battle…
This is most welcome. In the rest of the general press everything is so miserable it makes the rest of us miserable, so well done.
In relation to how law firms will structure themselves in the future: Although associate-to-partner leverage has, and is being, reduced, the real issue is the relative increase in the number of non-equity partners.
The increasingly larger ranks of non-equity partners are effectively acting as senior leverage, while helping the equity partners (who have the real business generating talent) to protect their already reduced profit shares.
Law firms are in fact giving up the pyramid model. They are hoping to in future to build ‘diamond shape’ models – the top tip being an ever tighter group of equity partners, the chunky middle part senior associates past 4PQE and non-equity/salaried/fixed share/local partners (ie senior leverage for want of another name), the lower end the junior associates/junior leverage – who in the future will increasingly be paralegals and contract attorneys.
I think we may see gearing adjust slightly over the next 18 months but long term I don’t see a dramatic shift that will alter the system long term.
I can see some firms moving to ratios of 1:1 or 1:1.5. If you want to focus on the high-end advisory stuff, much of the other work can be outsourced or
given to an alliance firm in India.
Obviously this raises some issue with the partnership track, and promoting future generations of partners, but surely not insurmountable.
The whole point is that leverage was so high, you couldn’t count the associates on a deal even if you wanted to. So it would be right to say “less associates”.
But in general, better you don’t split your infinitives before you correct others’ grammar…