City lawyers feel the chill

February 20, 2010

Britain’s top law firms expanded dramatically during the financial boom but, just as they rose with the City, they are now declining with it. One lawyer said: “Two American firms have gone under. I don’t think that’s going to happen in the UK, but we’re expecting a lot of jobs to be lost.”

Partners, especially those with equity in the business, should be particularly worried. They were once guaranteed jobs for life and earnings of more than £1m a year. Now more than 15% of the 12,000 partners in the City’s top firms could go.

Michael (not his real name) has been a partner in a second-tier law firm for more than 20 years. “My firm isn’t restructuring yet, but obviously we’re hearing about the top firms – the so called ‘magic circle’ – shedding dozens of partners in a bid to maintain profitability,” he said. “I’m worried about my performance – if I don’t deliver a certain profit, I earn less. But I’m not worried about my job yet because my firm is more collegiate and less cutthroat.”

It has been a miserable time for City law firms. Clifford Chance, Addleshaw Goddard, SJ Berwin and Baker & McKen-zie have announced a series of redundancies that brings the total number of law jobs lost during the credit crunch to more than 2,000. Some partners will not lose their jobs but will be stripped of equity.

Last week there was a leak that Linklaters, the world’s second-largest law firm, could cut 70 of its 540 partners, and 10% of more junior lawyers, as it focuses on fewer, more profitable, clients.

Law firms are in uncharted waters. In recent years many have undergone a change from a collegiate model to a corporate one. Some insiders claim that respect for “old-fashioned law” with a premium on technical excellence has now been replaced by the need for senior staff to generate business and manage client relationships.

“I hustle,” said Michael. “I go on trips. I contact potential clients. I take new products to sell. Big firms have institutional clients, who get handed on from generation to generation. If you have been sitting at your desk, waiting for your client to ring up and tell you what to do, life is now going to be tough. Who will want you?”

Catrin Griffiths, editor of The Lawyer, described the climate as a “perfect storm” and went on to predict that nearly all law firms would make redundancies, with women in junior positions possibly bearing the brunt of the job losses. “There are now more women than men entering the profession,” she said. “It has been hugely popular for graduates because, until recently, it has been seen as more secure than the City.”

According to Griffiths, the recession and dearth of work from some areas, such as private equity and property, have combined with a drive for greater professionalism and corporate management. “Top law firms have already been looking at outsourcing work, sometimes sending it to India. They have been looking at using agency lawyers. Now they are looking at which areas they are going to get work from in the next three years, and making adjustments accordingly.”

Few managing partners would be bold enough to predict which areas will remain profitable. One legal expert reported that, at the end of the Christmas holidays, most returned to their desks unable to judge how to set a budget for the year ahead.

While mid-sized and regional firms across Britain struggled in the last quarter of 2008, larger firms continued to see profits from international work in the Middle East, the Far East and Russia, paid for in euros and dollars, which have appreciated greatly against sterling.

Senior partners were often shuffled off overseas rather than face redundancies at home. But that source of work has begun drying up too as the recession goes global, and those partners have been brought home to face a bleak future. “Even Dubai is quiet,” one lawyer reported glumly.

Legal work on complicated financial products may have vanished, but some firms will be able to benefit from a surge in work on restructuring, insolvency and litigation.

The bigger deals could lead to fees of more than £30m and are likely to be fought over by many firms. Linklaters has more than 100 lawyers working on the Lehman Brothers administration. Slaughter and May, one of the City’s most traditional and successful practices, bagged the role of legal adviser to the Treasury and has worked on the nationalisation of Northern Rock.

Griffiths said: “It’s about retooling. There are new areas. As a partner it is no longer enough to be a good lawyer. You have to be all-singing and all-dancing – technically excellent but also a mentor and an income generator.

“Another aspect to consider is that law firms are structured on the basis that people will rise through the ranks and then leave. When there is a recession fewer people leave because there are fewer opportunities. At the moment law firms have hangers-on. Some will have to go.”

With many of those hangers-on at the senior end of the profession, employment lawyer James Davies from Lewis Silkin solicitors warns that firms should be careful of age discrimination.

“If you are a partner and you are 55, you probably know that you will not be getting another job. You have nothing to lose by claiming age discrimination against your former employer and asking for up to £4m,” he said. “It is easier to get rid of partners than salaried staff, but because the process is also less transparent, firms should ensure that they can justify their decision-making.”

Despite such predictions, a survey released on Thursday by Legal Week claimed that more than half of City lawyers still felt secure in their positions.

Our source, Michael, said he remained confident about his own future, and that of his firm. “The situation will get worse,” he said, “but I’ve been through two recessions and I know things will improve. Firms will get leaner, and they will come out stronger.”

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