The bigger and better excel in an unforgiving market

Law firms' worlds really did change in 2008-09. It was the worst 12 months for major firms since the early 1990s, and far worse than any in the preceding decade. Profitability, having avoided any substantive fall across the top 50 for more than 15 years, fell by 17.3%. And while there was slight revenue growth, without the strong euro and dollar in real terms fee income fell by around 2%. Dramatic indeed. For some observers, this must have heralded the humbling of the City leaders that so recently rode the markets to global glory. There would be a pleasing symmetry to that. But, unfortunately for journalists, the business world rarely behaves according to clear narratives. Large City law firms certainly took their knocks during 08-09, including job cuts on an unprecedented scale. But in cold, hard business terms it was anything but a bust for the magic circle which, with the exception of Clifford Chance, had a strong year. The newly-emerged breed of global law firm faced its first real stress test and, unlike its banking counterparts, passed with flying colours. Perhaps that is because it was generally a good year for the larger firms; firms just below the magic circle were solid performers for the second year in a row as once-dismissed practices like Lovells and Norton Rose hit a confident stride.

Below the top 20, it was a considerably bumpier ride. It has been another awful year for regionally-spread firms, with the partial exception of the stronger national practices. Another year or two like this and regionals will have faded as a credible force within the top 50. As expected, it was also hard going for mid-tier City firms unless they were light on property and mid-market M&A and heavy on litigation. Even though there is little sign of the predicted surge in general litigation materialising, insurance-heavy firms have been obvious winners this year, being the only group to improve profitability.

Looking forward, there is precious little sign of a rebound in 2009-10. The smart money is that demand will be flat or see further minor falls. However, with most firms having restructured, it will take a substantial worsening in conditions to upset the apple-cart again. A final point – there is absolutely no evidence that the law firm business model is failing in the recession. It has proved both resilient and flexible enough to bend with the market, providing your business is not built on high leverage and a couple of modish practice areas. The model will shift again: leverage will edge down, there will be more alternative billing. And it will remain an unforgiving market for the weaker partnerships and badly-led firms. But if this is a broken model, most of British industry would love to fail like this.

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