"With all this talk of recession I have to keep pinching myself, because business is good."
So says D J Freeman's chief executive Jonathan Lewis.

And he is not alone.

According to the first Legal Week/Axxia Business Confidence Survey, managing partners, senior partners and chief executives up and down the country are wondering what all the fuss is about.

Seventy-seven per cent of the 100 firms contacted in the poll believe their fee income will increase this year – by an average of 13%.

A similar number are also expecting to grow in size.

Compared to most other sectors in the UK, the figures reveal stratospheric levels of optimism.

A survey of consumer, business and professional services firms published by the CBI in December reported a balance of +17% of the respondents expecting their business to grow (that is, the percentage of firms reporting lower volumes of business subtracted from the percentage with higher volumes).

The comparable balance for the Legal Week/Axxia survey is +75%.
Nobody expects 1999 to be as good as 1998.

But if the firms which took part in the poll are right, commercial law firms can look forward to another good year.

Clifford Chance senior partner Tony Williams certainly expects his firm's fee income to grow quite strongly during the first half of the year.

But he warns that the legal sector tends to lag behind the rest of the economy – both in good times and in bad.

"The real question is what is going to happen in the second half of the year," he says.

And although Lewis is "bullish" about the prospects for his firm, and estimates that fee income at DJ Freeman will increase by about 10% this year, he is surprised at the extent of the optimism revealed by the survey.

His optimism is based on the strength of his firm's litigation department, a practice area which tends to do well during a downturn.

He is not expecting many of the firms which rely heavily on corporate work to prosper.
"I don't think they are going to see the same growth as they have seen recently."

Steven Fogel, the senior partner at Titmuss Sainer Dechert, adds: "I believe people in the survey are being somewhat optimistic."

"Lawyers have demonstrated in the past that when there is a downturn they tend to be too optimistic in respect of their own firms."

Like several other managing and senior partners who spoke to Legal Week, however, he believes law firms are better equipped to ride a recession than they were when the last recession hit.

"The last recession was the first time that law firms were being run by an organised management.

What that management will have done is taken on board the experience of that recession," Fogel said.

While 77% of the respondents in the survey expect fee earnings to go up this year, significantly less – 55% – believe profits will also rise.

The difference – which was not nearly so marked last year – suggests that firms expect their profit margins to be squeezed as competition for work hots up.

However, the Legal Week/Axxia survey indicates firms are also ploughing more fee income back into their practices in order to prepare for the economic downturn.

Asked what practice areas they envisaged expanding, the firms in the survey went for countercyclical ones, and in spades.

This fact in itself, Williams says, paints a rather more negative picture of the economic climate than the headline figures.

Of the firms in the survey 80% said they would be growing their employment departments, 75% said they would be doing more litigation and 68% said they planned to expand their insolvency practices.

The other most popular practice area – computer/IT – speaks for itself. Seventy-one per cent said they were planning to invest in this booming sector.

The figure shoots up even higher if small and medium sized firms are taken out of the equation. Of the firms with 200 or more fee earners, 91% plan to plough resources into this field.

Law firms are also investing more money abroad. Unsurprisingly, given the scramble for Europe so many firms have been involved in during the last 12 months, Euroland is the most popular destination for investment.

Thirty-seven per cent of the firms in the survey are intending to increase their investment on the Continent, where growth is expected to be more robust than in the UK. Include only the large firms, and that figure shoots up to 70%.
Again predictably, North America is the next most popular destination for investment.
The flip side to all this investment is greater competition as firms scramble to tap the best performing markets. That should be good news for in-house counsel.
There is certainly evidence in the survey that firms are becoming more client friendly.
Asked whether clients should be able to scrutinise their accounts at law firms, 48% of the respondents said they should.
Asked whether the same should apply to profit information, the figure slipped to 25% – although significantly more of the larger firms – 36% – said yes.
Much of the pressure on UK firms to become more transparent comes from across the Atlantic. And US firms are one of two significant outside threats to the leading UK firms.
The survey suggests it is the US firms rather than the accountants, the other main threat, who have the edge. Forty-eight per cent of the respondents said US firms have already had some impact on salaries and 14% said they have had a large impact.
More than half the managing partners, senior partners and chief executives surveyed thought a
US-UK law firm merger would happen before the Millennium.
But the Big Five were not far behind. Just under half the respondents also predicted that a major City firm would be acquired by one of the accountancy firms.
It looks like an interesting year ahead.