More on the C word

In today’s FT Michael Peel reports on the very recent Smith & Williamson survey,

The legal industry is heading for a big shake-up as firms merge in an attempt to protect profits threatened by the credit crunch, according to a survey published on Monday.

The annual survey of leading lawyers commissioned by Smith & Williamson, the financial services group, said three-quarters of big firms expected to see more emergency deals as confidence fell, despite the industry’s supposed resilience.

This is not news to us in the profession. It has already started and the current economic mayhem is simply accelerating the inevitable. In last week’s Law Society Gazette Lord Hunt, about to embark upon his profession-wide review of regulation, is reported as saying,

I will be listening to the views of the whole profession, and that includes the smaller high street firms as much as the global firms. I have a completely open mind about the best way forward. My message is – tell me what you think.

Let’s hope that there will still be some to tell him.

The C word – but which one?

The accelerating downturn, and the UK property market (both residential and commercial) hitting the buffers, has already started to change the legal market. Leaving aside the rumours of cash calls and firms in trouble, the middle market consolidation is starting in earnest (for example the recently announced merger of Withy King and Marshall & Galpin, to say nothing of the gossip circulating about who is talking to whom; or more interesting, who is not being talked to.)

It is an appropriate time to revisit Legal Services Reforms: Catalyst, Cataclysm or Catastrophe by Stephen Mayson, Professor of Strategy at and Director of the Legal Services Policy Institute. In his March 2007 review of the legal services marketplace (inefficient, ripe for reform) Mayson summed up its health as follows,

My diagnosis so far, therefore, is that we have too many qualified lawyers, too many law firms, and too many equity partners.

Later he identifies consolidation as a one of the key themes for the future, highlighting ‘the need to reduce the number of firms . . . in the interests of quality, consistency, efficiency and cost’.

Well, this is already happening and will gather pace. Mayson identified one of the drivers as the ‘natural forces of competition’. I would add to that diminishing fee income, the cost and, at the moment, the availability of borrowing, and the demographic imperative. To say nothing of the Legal Services Act, and the arrival of new entrants into the market.

But what of the lawyers indeed?

I suggested to one of my colleagues this morning that he should read The Lex Column, and in particular The law of diminishing returns. The question it put was

But what of the lawyers? As private partnerships, they are shielded from close inspection, but some pain probably lies just around the corner.

The answer?

But there are already signs of forced consolidation, especially among US firms overexposed to a sickly domestic market. Anecdotal evidence from European firms with big overseas networks suggests that several American outfits are desperately seeking mergers. Expensive offices in Hanoi and Bahrain used to be seen as a drain on partners’ takings; now they may be mandatory to survive. Charge-out rates fell, in real terms, during the recession of the early 1990s. Newly qualified lawyers should nail down those six-figure salaries while they can.

The comments were directed at the global players, but they hold good for most law firms. There is little doubt in my mind that consolidation, and pain, is coming. The current economic climate is yet one more accelerator.

It was not all doom and gloom

The good news is that, unlike banking, the industry generally bills on a time-spent basis, so failed deals and falling transaction values won’t annihilate takings. Insolvency and litigation practices, too, should provide a buffer, as businesses fail and claims mount. And there are a few cost levers to pull: routine word-processing and finance functions could be dispatched to cheaper locations worldwide.

Yes and no: time based billing is already under threat (see previous posts) and it is rare that there is not an element of contingency in deal fees.

Legal Week’s poll today is ‘Will a major law firm go the way of Lehman?’ (and see Charon QC’s post Law review; sackings, shortselling and stupidity. . .) And the voting? Currently 68% are saying No – law firms will tough it out and 32% are thinking we are all under threat.