Law firms have finally started moving seriously on costs. But, finds Alex Aldridge, they still have a long way to go before clients are convinced that they will see the benefits

Clients have for years been calling for their advisers to keep a closer eye on costs. And then, all of a sudden, their wish has been granted as City law firms have unleashed a barrage of cost-slashing measures barely into 2009 as they move to respond to the current recession.

The most eye-catching of these has been Allen & Overy's (A&O's) multi-pronged shake-up – the most sweeping to date. Announced on 19 February, the programme, described in these pages as "the kitchen sink solution", halts assistant salary rises and sets in motion plans to reduce lawyer head count by 9%. It also sees A&O become the only UK firm to date to publicly commit to freeze billing rates – a move that naturally caught the eyes of in-house lawyers. However, while general counsel contacted by Legal Week generally welcomed the move, they weren't getting too carried away.

"It is a step in the right direction," says David Curtin, general counsel (GC) of financial service company Northern Trust, summing up the prevailing sentiment.

The muted response is hardly surprising, given that A&O's rates – and City firms' rates in general – remain at historically high levels.

And the general feeling among in-house lawyers is that fees have some way to fall before they begin to represent a good deal. The problem, in-housers argue, is that fees went up far too much during the boom years.

Back then, UBS GC Peter Kurer was one of a number of leading in-house lawyers who expressed concern at such increases. Speaking at a Legal Week event in 2007, Kurer argued that rises in profits per equity partner (PEP) were not a result of increasing leverage, increased hours or efficiency, but mainly down to the fact that firms "have been able to increase their hourly rates every year". He continued: "We now pay more to lawyers than to accountants, management consultants, PRs or anyone else – and it is difficult to control because we use so many."

Dig a little deeper into the emotive subject of fees and it becomes clear that the real gripe is with associate – rather than partner – rates, which are widely recognised to be over the odds given the lack of experience of junior lawyers. Writing last month in Legal Week, Paul Lippe, founder and chief executive officer of Legal OnRamp, an online community for corporate counsel and law firms, describes associate time as "the price for getting access to partner time and to the firm 'brand'".

Susan Hackett, GC of the Association of Corporate Counsel, has a similar take: "I don't have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn't worth it."

Accordingly, it appears that many in-house lawyers won't be happy until there are substantial cuts in the charge-out rates of junior lawyers.

Others suggest the real issue is not rates, but value for money. Deepak Malhotra, GC at drinks company Constellation, reckons there is little correlation between the two: "Increases or decreases in billing rates do not have a lot to do with the actual value you get from a law firm," he says.

Malhotra says that getting value is all about transparency – not something for which City firms are renowned. With this in mind, it is understandable that some in-house lawyers are rather cynical about whether moves such as A&O's decision to hold headline billing rates will have much impact on the ground.

Richard Given, Cisco emerging markets director of legal, speculates that firms may employ underhand tactics in order to mitigate any profit falls arising from frozen fees. "Will a freeze in fees really make a difference?" asks Given. "Or will work just migrate up the seniority chain, perhaps with partners working with junior lawyers when they should not be?"

A&O's rates freeze is, of course, just one of a range of measures being employed by the firm. So what do in-house lawyers think of the restructuring package as a whole – and other packages like it? "I am surprised this sort of thing hasn't happened earlier, to be honest," says Nick Deeming, GC of auction house Christie's.

ITV GC Andrew Garard likewise thinks firms have been worryingly slow off the mark: "It's a case of fiddling while Rome burns. If we look at the current economic climate it is clear that this is too little, too late. Radical intervention will be needed for law firms to cover their overheads." Garard predicts deeper cuts at equity partner level will be necessary. Given agrees, suggesting an additional cap on partners' drawings.

At the same time, in-house lawyers emphasise, perhaps somewhat contradictorily, that the associates as the "life blood" of firms should be protected in any further restructurings. "Associates are the future," says Garard.

How far cash-strapped firms are able to conform to the noble principle of protecting their young is another matter. In his blog post, Lippe envisions a bleak next couple of years, predicting a 20% drop in firm revenues by 2011 – a figure that would require the cutting of overheads by at least 40% in order to maintain profits.

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