All change for the law, post downturn
LAW firms have been hit hard by the recession, and many have been radically slimmed down to survive plummeting demand. Increasingly, it looks that the industry will look dramatically different after this downturn.
One area where there will be change will be in terms of leverage structures – the number of junior lawyers per partner. “What clients want at the moment is senior advice,” says Charlie Geffen, the senior partner at City law firm Ashurst, “and therefore the leverage model isn’t working so well, because it is transactional work that keeps the junior lawyers busy, and that is where the profitability is.”
Steven Davis, chairman of the New York-headquartered global law firm Dewey & LeBoeuf, agrees. He says: “Leverage has, in some cases, been a key to law firm profitability, and that is under pressure because the clients are expressing greater and greater unwillingness to pay for platoons of junior lawyers. Law firms that were highly leveraged are going to continue to come under pressure.” The firms that will prosper are those that can rely more on high-level relationships between partners and sophisticated clients.
A second feature of this recession has been that international law firms have been hit hard. Steven Davies says that they have suffered more than in previous downturns because this one is global in nature, and international firms have been hugely exposed. “I think what we are seeing is more likely to be a paradigm shift in the model than a cyclical movement, as some of the effects are likely to be here for a long time.”
Can the international law firm survive? “My answer is an emphatic yes,” Davies says. “We increasingly have workflows that emanate in other parts of the world and then require US or UK lawyers – right now we have some major M&A coming out of Asia. The global model, which has coverage on the ground in the key financial and commercial markets, is absolutely critical for success in the future, especially as some of the non-mature markets continue to develop.” He argues that firms will look to diversify in the longer term, and those with offices in new markets such as China, India and the Middle East will most likely prosper.
There is a similar argument around practice diversification, where firms with large capabilities not only in finance and mergers and acquisitions, but also in areas such as litigation and financial regulatory work, will be best able to mitigate the effects of future recessions. The current credit crunch has hit firms with specialist banking teams the hardest.
This all leads to questions about consolidation. Geffen argues that consolidation on a global scale now looks more likely as firms reshape to face an uncertain future. He says: “The downturn highlights the fact that there are just too many law firms. The banks need the major law firms, but they are saying there are a lot of strong firms and so prices are going to have to come down. There is currently more capacity than the market needs.”
The last decade has seen the rapid expansion of the world’s largest law firms, and in particular the four largest London outfits: Clifford Chance, Linklaters, Allen & Overy and Freshfields Bruckhaus Deringer. While such expansion is now likely to slow, smaller firms may have to consolidate in order to compete. Geffen says: “Outside of the global law firms, we would say there’s then about 12 or so international firms, of which Ashurst is one, that are smaller. What’s interesting is what happens to that group.”
We will only be able to evaluate what this means when we see which firms have managed their way through and emerged stronger and more competitive. Interesting times are coming.