Storm damage

Some law firms will be able to ride out the credit crunch relatively unscathed, others will likely not survive.

Storm damageJust as different ships will weather a storm in different ways, so the economic downturn is having a widely differing impact on the legal profession. Some managing partners are sleeping easy, keeping a steady hand on the wheel. Others are losing sleep, their minds racing, wondering how best to avoid hitting the rocks.

Few managing partners in any of the top 250 law firms believe they have anything fundamental to worry about. They are the supertankers, many with global, or at least international, reach. They have their own largely unstoppable momentum.

At litigation giant Barlow Lyde & Gilbert, fee income from its corporate and pension department is only 15 per cent of turnover and, according to a senior partner at the firm, “any fluctuations have limited impact”.

The firm is 85 per cent litigation, most of it insurance funded one way or another. Many at the firm may express surprise, reflected in other firms across the country, that the upturn in litigation instructions that ­usually follows the onset of a recession is slower than expected.

In the North East, regional firm Dickinson Dees has no less confidence in the future. Senior partner Robin Bloom makes no bones over the necessity for the ­redundancies they have had to make in their volume business division D3, first hit by the Northern Rock debacle and then by the general downturn. Bloom stresses the need for clear communications.

“Staff respond well when the reasons for management decisions are properly explained,” he says.

Across the profession, strategic plans are being fundamentally reviewed, questioning business models that have long been accepted as standard. In two or three years’ time, the Eversheds model of flying a flag in every major business centre in the country may be seen as old-fashioned and out-of-date as gas-guzzling 4x4s are seen today. They are being replaced by original, quick-footed, client-facing strategies aligned to the Legal Services Act deregulation.

Small property-based firms are taking the brunt of the storm. One two-partner niche residential developer practice outside London has seen a 25 per cent reduction in its land acquisition work, a 60 per cent reduction in plot sales and an overall ­downturn of 35 per cent.

The decline began in October 2007. In April 2008 the partners reduced their drawings and began ­shedding staff – from 40 to 20 to stabilise the business. As they have no borrowings they can tread water and abide events. But not every small firm is as fortunate, nor as well run.

The worst-positioned sector of the ­profession is the two or three-partner high street practice with predominantly private clients and 60 per cent dependent on residential conveyancing. One well-respected firm in Dorset has dismissed all but one of its 12 conveyancing staff. The partners are doing the available work themselves. They cannot simply shut up shop as they practice heavily in overdraft. They are living from week to week, facing a stark future.

Difficulties also face a four-partner ­Walsall firm. When its senior partner returned from holiday at the end of July, his partners greeted him with the demand: “Resign now or we dissolve the partnership”. The downturn has heightened ­longstanding tensions over inequalities of contribution and drawings. They have no partnership agreement to restrain their volatility. In that firm, it is clearly every man for himself.

In many firms, current financial ­problems are putting relationships between partners under extreme pressure. Perceived underperforming partners feel under threat; those more able or more fortunate resent carrying a lame dog. Partnership meetings become clouded just when clarity, control and objectivity are most called for. The ­partners are locked in and must perforce make the best of their situation.

There is increasing demand for external advisers objectively to monitor management accounts and key performance ­indicators, to chair meetings and to enable the partners collectively to pull together and individually to improve their billing and professional performance.

In some quarters there is regret at the timing of the downturn, with its likely ­duration until 2012 or even beyond. The fear is of a debilitated profession, lacking well- resourced sustainable businesses that could otherwise have taken full advantage of Legal Services Act deregulation, alternative ­business structures and the possibility of outside investment.

Others take the contrary view, arguing that the present rigors are a good foretaste of the hostile market the profession will face on deregulation, at a time when the likely predators are still held at bay. The downturn is confronting most practices with enforced change, precipitating further consolidation and the delivery of higher value-for-money, client-attuned services.

Painful though the process may be, the attrition level is far less now than would be the case if Tesco, the AA, the banks and all the other potentially predatory institutions were in the field at the same time.

Geoffrey Hand is director of Peer Professional Development