Law firms ready to ring in the changes for uncertain 2010

Charles Martin

Leaders at the top firms have warned that the legal sector is not quite clear of the worst ravages of the recession as it moves into the new decade.

Senior figures have ­highlighted a number of challenges that firms need to meet to sustain profitability in 2010 and beyond.

These include finding new workable fee models, negotiating a still shrinking transactional pipeline and satisfying an increasingly demanding client base.

Some have suggested that the leaner, more demanding marketplace of the future could even spell the end for firms with weak ­management strategies.

Peter Kalis, chairman at US firm K&L Gates, said: “The law firms that remain conservatively financed and diversified across nations, markets, currencies, ­practices, industries and clients will absorb the shock of the seismic events in the global economy. Other firms will disappear or fade into ­irrelevance.”

Following a year in which several top firms undertook restructuring programmes on an unprecedented scale, there are still signs that the worst might not be over.

Charles Martin, senior partner at Macfarlanes, said: “You don’t need a ­crystal ball to know that restructuring will be a major feature of the year as the excess leverage of the ­middle of the past decade begins to be unwound.

“Financially it would be brave to think that 2010 is going to be a vast improvement on 2009. Against that background, prudent law firms will continue to sharpen efficiency levels, look at better client service and improve ways of organising themselves internally.”

Developments likely to have an impact on the market over the next 12 months include the expansion of the legal process outsourcing (LPO) market, changes in fee models and the impact of the Legal Services Act.

The need to tackle ­diminishing profits will be the driver for many of the changes that could hit the sector in 2010 as firms brace themselves for harsh year-end results. Of those firms that released half-year ­figures in November 2009, only three of the top 50 saw rises in revenue.

Efficiency has quickly become the watchword for those with their hands on the purse strings at major firms. Whether this means changes to outsourcing ­policy, client charging or further rounds of redundancies remains to be seen.

Chris Perrin, general counsel at magic circle firm Clifford Chance, said: “The larger firms will continue to find ways to work more ­efficiently. We’ll go on seeing firms moving their back-office staff to cheaper ­environments offshore.

“There’ll be changes to the way charges are levied to clients – we’ll see more ­innovative charging.”

While there is broad agreement that the lean times are here for a while, some remain cautiously optimistic about the future.

“We can’t predict when the worst of the recession will be over,” said Howard Morris, chief executive at Denton Wilde Sapte. “But activity in banking has picked up, ­technology, media and telecoms has remained strong throughout the past year and restructuring continues as a strength.”

Those firms that do not want to stagnate over the coming years are being urged to diversify, especially as the domestic market in the UK remains thin.

“I don’t think anyone’s ­saying the market will go back to the period of ­frenetic activity that it was,” said Olswang managing partner David Stewart. “The next two or three years are likely to be patchy. The key will be building and sustaining strong client relationships – the way to do that will be to offer something different, such as a sector approach.”

Another way for firms to guarantee their futures is by combining forces. While the expected merger boom at the start of the previous decade failed to materialise, the current fear factor may push firms in that direction, with Lovells’ tie-up with Hogan & Hartson leading the way.

“People always feel ­vulnerable at the end of a ­recession,” said Norton Rose chief executive Peter Martyr, whose firm is about to merge with Australia’s Deacons. “There will be discussions about potential mergers, but they’re more difficult to pull off than people think.”

#Additional reporting by The Lawyer staff