When the numbers don’t add up anymore
20 May 2013 | By Joanne Harris
Redundancies are sweeping the legal industry as firms of all sizes adjust to a world of permanent price pressure - and partners are no longer secure in ivory towers
Unemployment in the UK rose to 7.9 per cent in April and law firms are feeling the pain again. Since January more than a dozen firms have announced redundancy programmes or office closures, and this comes on the back of a number of others that initiated consultations last year.
The latest firm to announce it is planning to cut jobs is Berwin Leighton Paisner(BLP), which confirmed a consultation over 58 legal roles and 44 support roles on 14 May. After Eversheds, which said it was consulting with 84 staff and 82 lawyers in January, BLP’s redundancy round is the biggest so far this year.
That said, things are not yet quite as bad as 2009, when firms of all shapes and sizes were making lawyers and staff redundant in large numbers. Back then some firms managed to stave off the cuts by moving to flexible working. Norton Rose was the flagbearer of this strategy with its successful four-day working scheme, but many others bade farewell to upwards of 50 - and in some cases, over 100 - lawyers and support staff.
Most expect the redundancy programmes announced this year to be followed by static (or worse) financial results. Indeed, financials are already slow coming out for the 2012/13 financial year - normally there would have been a steady flow of provisional figures by now. But save for a handful of small firms celebrating turnover rises, little news has emerged.
The problem is simple: the numbers no longer add up.
“Pricing pressure is continuing and utilisation hasn’t improved,” says Jomati principal Tony Williams. “If you have utilisation at 1,200 hours and you need it at 1,500 hours, the maths are fairly simple.”
“What we’re generally seeing is that firms are having to fight really hard to maintain income levels,” agrees Smith & Williamson head of professional practices Giles Murphy. “People are working harder just to deliver the same level of income as the previous year.”
In fact, what surprises some is that there have not been more redundancies so far this calendar year. Murphy recalls that in 2008 and 2009, the first wave of firms to announce job cuts were met with a chorus of disapproval, but then “everyone was at it”.
He says Smith & Williamson’s annual survey of the UK legal market shows a drop in confidence this year.
“This time last year there was a belief that things were getting better. The reality is they’re not.”
Despite this, at the top end of the profession, salaries are on the up. Allen & Overy, Linklaters and Slaughter and May have all announced pay rises for trainees or associates this year. Only Freshfields Bruckhaus Deringer confirmed a freeze in associate pay and kept its trainee salaries static for the fifth year in a row.
“If your firm does a pay increase, it’s going to have to find a way to pay for it,” observes Williams.
The magic circle, of course, may yet prove to have profited from its international presence to avoid suffering in the same way as firms with a more domestic focus. In this group, the redundancies are likely to continue.
Murphy suggests that the firms which have announced job cuts are actually to be applauded. Although the process is never easy, moving to cut costs in this way shows a firm is trying to deal with any financial or utilisation issues it has rather than turn a blind eye. After all, Cobbetts was doing the opposite and hiring people just days before it went into administration.
“What Cobbetts has proved is that well-known law firm brands can go bust,” Murphy says, adding that this may have been a wake-up call for some.
All in it together
It is often the case that a redundancy story on TheLawyer.com prompts a wave of comments criticising partners for wanting to protect their profits while junior lawyers and support staff take the hit. However, anecdotal evidence suggests that partners are quietly being managed out or de-equitised at a number of firms, their status as self-employed staff enabling firms to avoid having to make public announcements.
“A lot of profit improvement in firms is actually a reduction in the number of partners rather than anything else,” says Williams.
Murphy adds: “I see this as a positive - that firms are addressing partner performance.”
The crucial difference between the present round of redundancies and those that took place at the start of the financial crisis is that whereas in 2009 everyone hoped things would soon get better, firms are now adjusting for a new reality in which price pressure is a fact of life and lawyer supply has to be addressed. Few firms have the ability to cut much cost out of other areas of their business, with property the only other area of significant cost load.
Case for optimism
“I’m optimistic that 2013/14 will be a better year but we’re not going to be off to the races,” predicts Williams.
Murphy also points out that many firms are having to invest in their IT systems to cope with the demands of an increasingly technology-focused world. It is a cost that must be borne now to save in the future, but again, saving money on salaries is a way of paying for that investment.
So a prudent firm is probably one that is addressing the question of its people costs. But those entering into redundancies have to try to carry out the process in as sympathetic a way as possible and minimise reputational fallout - another challenge in an already challenging world.
What happened last time
The previous big wave of redundancies in the legal market kicked off in mid-2008 in the regions as a result of a downturn in property work. Firms including Bond Pearce, Dickinson Dees, Matthew Arnold & Baldwin and Shoosmiths closed offices or laid staff and lawyers off.
The consultations continued into the autumn of 2008 as more regional and national firms got involved. Eversheds began what was to be the first of four consultation rounds, making 33 redundant and closing its Norwich office.
Halliwells undertook three redundancy rounds in 2008 and a fourth in 2009, losing more than 50 staff in total.
In early 2009 the magic circle started getting involved. Allen & Overy (A&O), Clifford Chance and Linklaters all launched consultations. By the time these were complete hundreds of lawyers and staff had lost their jobs from these firms. At A&O, 200 fee-earners and 200 staff, plus 47 partners, had left the firm, on top of a de-equitisation programme.
Linklaters’ ‘New World’ strategy saw a cut of 4.8 per cent in the firm’s City workforce, while Clifford Chance consulted with 880 members of staff to make around 80 redundant.
The next group of firms to enter redundancy consultations were the other big international players, including Baker & McKenzie,
Cut and freeze
As early as January 2009 The Lawyer reported that more than 2,000 jobs were at risk among the UK 200, a number that would rise as the year went on. There was a second wave of redundancy announcements mid-year once financial results were released, with firms such as Addleshaw Goddard and Wragge & Co cutting more jobs and freezing salaries in an effort to mitigate the effects of the crisis.
Several firms also deferred their trainee intakes, recognising that they did not need the same numbers of junior lawyers as previously.
However, some went down a different route. Norton Rose and chief executive Peter Martyr won plaudits after it introduced a plan that gave staff and, crucially, partners the option of working four-day weeks on 85 per cent of pay, or taking a sabbatical of up to 12 weeks on 30 per cent of pay.
Freshfields Bruckhaus Deringer, Mills & Reeve, Salans and Simmons & Simmons introduced similar schemes - mainly focused on staff and lawyers.
By the end of 2009 the worst was over, and a pick-up in financial results in 2010 meant the scale was reduced. The trickle of firms entering redundancy consultations in the past three years has continued - but, until now, at a slower pace than in those two torrid years.