Legal market shrugs off lack of activity with further growth

The Lawyer's Law Firm Business Confidence Survey for the fourth quarter of 2001 gives rise to optimism for the future

According to the latest business confidence survey carried out by Wheeler Associates and McCallum Layton on behalf of The Lawyer, law firms are regaining confidence in the market.
Despite the sharp downturn last year and fears of a snap recession, the picture did not become so bleak that the legal market stopped growing.
However, fee growth across the board was initially sluggish. At the start of 2001, fee growth across The Lawyer 100 firms was between 20-25 per cent. Three months later and law firms had to cope with a huge battering of confidence as fee growth hit only 6 per cent.
Managing partners, though, are becoming more optimistic, with nearly half (46 per cent) expecting their firm's fee income to grow over the next six months, compared with only 35 per cent in the last quarter.
But the predictions are modest, with only a 4 per cent average fee income rise expected. The forecast in the last quarter was for growth of 3 per cent.

“The slowdown creates the opportunity to come up with innovative ideas that you don&#39t have time for in the boom”
Roger Birkby, Norton Rose

About half of the managing partners questioned could not see a way up and did not think their fee income would change. The regional firms are the most upbeat of the bunch, hoping for a 5 per cent increase in fee growth, as opposed to the City firms, which expect just 3 per cent.
But some firms are using the slowdown to their advantage. “Corporate transactions and capital markets did slow down last year,” says Norton Rose managing partner Roger Birkby, “but that creates the opportunity to build client relationships and to come up with more creative and innovative ideas that you don't always have time for in the boom.”
Those areas that managing partners are predicting better incomes from are, unsurprisingly, insolvency and corporate recovery, with 10 per cent growth forecast, closely followed by litigation at 7 per cent. Corporate finance is not so promising. The last six months have seen a dwindling demand for corporate finance lawyers, but City firms are hoping for a 1 per cent growth in income over the next few months. They do not expect that rise to come from increased fees, however, and are bracing themselves for a 1 per cent decline, an improvement on the 5 per cent slide they predicted three months ago. E-commerce is widely predicted to continue to be a dead duck on the market, with no predictions for growth.

While the predictions for fee income variations are not that dramatic, profit predictions are a different story. Confidence is building again and nearly half of the managing partners believe that profits will grow over the next six months, whereas last quarter only 23 per cent expected growth.
Forecasts for average profit growth are also up from last quarter. Firms expect the figure to be 5 per cent growth within six months. On this occasion, it is the City firms that are flexing their muscles. Managing partners in the City believe that profit growth will be 6 per cent in the next six months, as opposed to 2 per cent from the regions.
Key issues
The fear of an economic downturn is no longer keeping managing partners awake at night. With clients increasingly drawing in their belts, firms are much more worried about whether they will face pressure to reduce fees and whether clients will pay the final bill. At the beginning of the year, late payment by clients was a concern to only 24 per cent of lawyers; now the figure is 62 per cent.
Fee pressure has also affected an increasing number of lawyers – 52 per cent of lawyers are now affected, as opposed to 20 per cent in the first quarter.
Lawyers, however, are not concerned about their own bank balances – while 41 per cent were worried about salaries in the first quarter of last year, only 8 per cent are still sweating.
Cost reduction and revenue protection
Law firms are faced with two options in the current climate if they want to protect their profits. Seven per cent of law firms are seeking to reduce their costs, 42 per cent are opting for revenue protection and 33 per cent are opting for both. This is heartening, as it shows that the market has not suffered to the extent that costs have to be cut.
The provincial firms are again fighting ahead, with only 15 per cent cutting costs as opposed to 53 per cent of City firms. Among the preferred cost-cutting measures are: deferring investment decisions (42 per cent), stopping bonus payments to lawyers (17 per cent) and redundancies (4 per cent). Revenue protection is a far more positive strategy, with 96 per cent of firms focusing on key clients, 91 per cent focusing on core areas of practice and 85 per cent developing marketing. Two-thirds of the managing partners are confident that, by adopting these strategies, they will be able to protect their positions in 2001.
Nigel Knowles, managing partner at DLA, says that his firm has grabbed the moment. “We've used this opportunity to focus spending on key areas that build and support the business, concentrating on the development of people services, our client relationship management programme and our alliance of law firms,” he says.
The report seems to suggest that, for most law firms, the way ahead is now clear. Although the market is not improving dramatically, it is certainly stabilising and it has managed to endure the hardships of the last half year fairly well.

Practice area
Average fee growth over next six months
Q4 (%) Q3 (%) Q2 (%) Q1 (%)
Corporate finance 1 -4 -1 2
Commercial property 1 2 5 5
Commercial litigation 7 8 8 9
Insolvency/corporate recovery 10 15 12 12
HR-related 6 8 12 10
E-commerce 0 -2 1 1
International 4 1 8 7
Source: Law Firm Business Confidence Survey

Actions to reduce costs
Proportion of firms pursuing cost-reduction strategies (%)
Reducing overheads (excluding staff) 67
Deferring investment decisions 42
Greater use of IT to reduce costs 42
Freeze on recruitment 33
Better control of expenditure 33
Re-engineering the delivery of services 29
Reducing/stopping bonus payments to support staff 21
Support staff redundancies 17
Freeze on salary increases 17
Reducing/stopping bonus payments to lawyers 17
Partner redundancies 8
Lawyer redundancies 4
Source: Law Firm Business Confidence Survey