Unprecedented times are forcing firms to evolve and adapt, with partner culling and de-equitisations keeping people talking. Dominique Graham reports

The legal profession is undoubtedly facing something of a shake-up. The wake-up call from the general counsel at Graham Gill’s latest roundtable, ‘How clients and lawyers can assist each other in a recession’, was alarmingly clear: share the pain with us, think proactively and above all do not be complacent.

Listening to those around the table, the general view seemed to be that those firms not robust or flexible enough to absorb a reduction in revenue (whether caused by fewer deals or discounted fees in a bid to remain competitive) were putting themselves at risk.

At least one magic circle representative declared their firm’s strategy to encroach upon the natural preserve of mid-market firms by offering a lower rate for less complex work. If a leading brand name embarks on such a strategy, it will be hard for the rest of the top 10 firms to argue the risk of brand devaluation.

Overall, the message was clear: firms had no option but to develop or rethink their strategy. Unprecedented times will force the structure of law firms to evolve and adapt. The best business model will accept the inevitability of change and be nimble enough to adapt its structure accordingly.

The increasing polarisation of law firms with global players on the one hand and niche firms on the other leaves those in the middle seeing their market share increasingly encroached upon. Salvation for them may lie in consolidation, and it is no coincidence that our merger mandates have shot up since the summer.

Part of the competition for supremacy involves the hunt for, and retention of, talent. The hunt for talent does not abate in times of recession — it merely becomes more focused. Over the past few years, talent has become synonymous with business development skills. Generating fees through strong or historic client relationships (and preferably in a sector focus) means talent can visibly contribute to the bottom line.

Firms that have failed to carve out a strong position during the good times will face losing a number of their stars. Unsurprisingly, those offering an international reach, leadership in their sectors and strong profitability are the most attractive.

Cutting back

So who is vulnerable in a depressed economic climate? The 1990s recession saw a whole generation of commercial property assistants wiped off the map. It was a rare event to get rid of a partner.

This time, the shift of focus has been startlingly different, and it is partners as opposed to assistants who are in the spotlight of management scrutiny first.

This is partly a reflection of the evolution of law as a business, but also a response to escalation of profits and remuneration levels. Law firms have become much larger and the legal scene has evolved into a sophisticated business, dominated by global giants run along corporate models complete with five-year strategy plans and a beady eye on the bottom line.

Cutting underperforming partners in a bid to reduce costs makes sense. The latest roundtable consensus was that assistants were the ‘lifeblood’ of a firm and partners’ profits, or indeed partners themselves, should be cut before cutting the associates.

As recently as 10 years ago, it was unheard of that a firm of the stature of Freshfields Bruckhaus Deringer might choose to shrink its partnership by as many as 100, but competitive pressures led it to do just that, and the current economic climate is forcing other firms to follow suit.

The first casualties we have seen are the so-called ‘boom’ partners: solid, technically competent people who were brought in to service an overflowing pipeline of instructions.

Depleted pipelines of work have rendered these boom partners redundant. Unless they can retool, and retool quickly, they will find themselves under intense management scrutiny.

Next in line, we have seen a surprising number of senior (and therefore expensive) partners at the top of the lockstep facing de-equitisation. It began as a trickle just before the summer, and has grown to a steady flow since September 2008. De-equitisation is a hard thing not to take personally, particularly after many years’ service, but business is business. Those who fail to stand out, or who are perceived to be a greater cost than an asset, will find themselves in an uncomfortable position. That said, law firms need to be careful not to lose their good people in the wake of any culling activity: poor man-management can be costly.

Difficult times bring forward tough decisions — the axe is also falling on senior associates who would otherwise enjoy another two to three years before being told that partnership is not on the cards.

One of the lead accountancy practitioners at the roundtable described their recent redundancy programme. I understand it may intend to cull up to 10%-15% of their workforce. Judging by those walking through our door, I see no reason why the legal profession will not show similar figures.

Whether for firms or for individuals, flexibility is key. An ability to respond effectively to change is key to survival. Easy words, harder in practice. But no one said survival was easy.

To finish on a lighter note, it occurred to me that the combination of the letters ‘re’ has become a popular one: as a finance lawyer in a recession, you should focus on adding restructuring or refinancing to your skills set. If management ask you to retool and enlarge your specialism, you should do so. If you are asked to relocate, you should show willing. If you see your profit or profit points reduced, do not assume it is not happening elsewhere.

However, if you are in real estate, the combination is perhaps not such a lucky one. Unless you’re called Reginald, maybe.

Author: Dominique Graham
Published: 15/01/2009