Law firms like to believe they are apart from much of the trading pressure that affects their clients. Recent experiences in the West Coast of America, and to a lesser extent the European equity and debt markets, show how illusory that isolation from the shocks of the global corporate markets really is. As shown in this week's news analysis, the lessons of the Silicon Valley fallout, the global legal community's very own South Sea Bubble, are compelling. In the worst excesses, a group of small firms translated law into a virtual fund management business where clients were shuffled like stocks. This level of exposure raises questions that run far deeper than the taking of limited equity stakes in selected clients. In short, a small group of law firms became infected by short-term venture capital and equity markets, and we all saw how quickly the infection was passed on to New York and the City firms in the form of soaring pay rates. For law firms, whose labour supply is inherently inflexible, the dangers of overreacting to such external pressures are self evident – though this year's pay round suggests otherwise. Likewise, shifts in structure and management are gearing global firms ever closer to inherently volatile markets that they serve, the consequences of which are only now being understood.
Top firms must now continue the major strides they have made in the last decade in governance and risk management if they too are not to fall foul of the markets. That is not to say they should not respond to the changing environment. Technology-based industries are markets that firms rightly believe they must pursue, as long as managing partners realise the ends do not always justify the means. And perhaps the most intriguing aspect of the Silicon Valley experience lies now in the opportunity for large firms to pick up struggling West Coast practices. Well-run businesses taking over badly managed but innovative firms? Why not? In law as in business, the fundamentals eventually reassert themselves.