Law firms ready to ring in the changes for uncertain 2010
Surviving recession still top of agenda; diversification, restructuring and mergers could save the day
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
Readers' comments (9)
IHateBPP | 4-Jan-2010 1:58 pm
How like The Lawyer to ring in the new year with predictions of doom and gloom.
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Anonymous | 4-Jan-2010 3:54 pm
"We’ll go on seeing firms moving their back-office staff to cheaper environments offshore."
Isn't that a rather short sighted view? Shouldn't firms who rake in £ms from UK companies be obligated to reinvest in the UK - surely offshoring does nothing for our economy in the longer term.
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Clergham | 5-Jan-2010 8:32 am
Whatever happened to morality in business? "Improving efficiencies" is just a crass euphemism for ruining minions' lives.
Partners should be in no doubt about the often irremediable suffering they create when they can people to protect PEP.
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KRUSTY THE KLOWN | 5-Jan-2010 9:19 am
"Why should God have anything to fear from reason?"
These words, poetic licence permitting, of Benjamin Franklin are of equal application to the current legal market.
Sensible and honest self awareness is the key to survival in any environment; blue sky thinking (the sort of thinking that embraces merger) will not help.
Any sensible "eat your greens" firm will see opportunity in what we undoubtedly face - they will make lemonade from the lemons dished up by the economy and the inevitable bankruptcy that follows every Labour long term office period.
I'm looking forward to 2010 - an ice age I can believe in!
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Anonymous | 5-Jan-2010 11:53 am
In the past when consulting engineering firms were chosen solely on the quality of the teams they put forward for projects the fee model was one which Clients should look at in today's market. The gross annual salary of the worker bees was divided by 1750 to come up with an hourly salary cost figure and then multiplied by 2.85 to cover overheads and supervision by partners etc. Roughly speaking a lawyer on £100 K would have a charge out rate of £ 180 per hour.
Clients have ALWAYS the whip hand. Perhaps they ought now to exercise it, and bring sanity and sense into legal costs.
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Tom | 5-Jan-2010 12:08 pm
It's quite to run a moral business that's bankrupt. And I can see the long term advantages of moving some parts of a business off shore, especially if it's into emerging markets or if it means the firm can provide clients a better deal (whether their domestic or international clients).
But I do agree that going after an impressive PEP is ridiculous as it doesn't really show the financial health of a firm. And it's certainly true that bad handling of redundancies can be damaging to those leaving, those staying and those potentially joining one day. All that we can hope for is that we go into this profession with a clear idea of what it involves and what firms priorities are but also that those employing us treat us with respect when they make decisions that affect both our careers and ultimately our lives.
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ethical lawyer | 8-Jan-2010 11:54 am
It is odd to call a business that lays off staff immoral. By the same token a badly managed business that squanders its opportunities for growth and so creates fewer jobs is also immoral.
High PEPs are usually a sign of business growth and strength. They have often involved the creation of jobs that might not otherwise have been there. By that measure they are more moral than low PEPs.
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Rob Millard | 11-Jan-2010 1:26 pm
There are still 11.5 months before we move into the next decade .... the first decade of the 21st Century runs from Jan 01, 2001 to Dec 31, 2010 .... just like the first decade AD ran from From Jan 01, 0001 to Dec 31, 0010 ..... and not from Jan 01, "0000" (there was no such year) to 31 Dec 2009 as those who got all excited on 31 Dec 1999 instead of 31 Dec 2000 (ie most of the world) apparently believe.
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Joe Bloggs | 24-Jan-2010 4:20 pm
There never was a "first decade" either! Who do you think was counting at the time? It makes perfect sense to count the ten year period from 2000 to 2009 inclusive as a decade - why complicate things? It is this sort of impractical and unjustified pedantry which gives lawyers a bad name!
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