The first signs of recovery?

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.”

“We’re committed to the pyramid stucture for the next four years,” said ­Travers Smith managing partner Chris Carroll. “Deciding on changing it in five years is a pretty brave thingto do – in fact, it’s barking mad.”

Ashurst senior partner Charlie Geffen said: “It’s clear that at the moment clients are demanding a lot of senior time, but it isn’t always going to be like this.”

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.”