As managing partners forecast a tough start to 2012, firms focus on growth outside Europe. Simon Petersen reports

Partners at UK law firms are bracing themselves for a challenging year ahead as the eurozone debt crisis and fears of a double-dip recession dampen the economic outlook for the second half of the 2011-12 financial year and beyond.

With the United Nations warning that 2012 will be a "make-or-break" year for the global economy and European leaders this week attempting to forge a workable solution to the escalating financial crisis within the eurozone, it is little wonder law firms are predicting a tough 2012.

Half year results for the period ending 31 October have in general been positive, with star performers, including Olswang and Allen & Overy (A&O), seeing double-digit increases in fee income compared with the same period last year.

But with the debt crisis already paralysing the deal markets in Europe, even those unveiling robust H1 results are far from confident about the second half of the year, as they wait to see the results of France and Germany's latest plans (announced 5 December) to strengthen national finances within the eurozone.

Allen & Overy (A&O) senior partner David Morley (pictured) comments: "Unless the eurozone crisis is resolved fairly, decisively and quickly, the risk of a global economic slowdown resulting from a loss of business confidence must be a real one."

"Like a lot of firms, we had a strong first half of the year," says Eversheds chief executive Bryan Hughes, continuing: "But since the summer we have seen the market slow down as confidence has started to ebb away, largely due to the euro crisis."

White & Case London head Oliver Brettle says: "The great unknown is whether the eurozone will get its act together. If it does, there will be greater fiscal conformity and greater centralised power, which may result in the UK being pushed further to the periphery of the eurozone. If the eurozone fails to get its act together, the euro will be weakened, which will in itself have a long-term impact. The outlook is challenging either way for the UK."

With the markets barely picking up after the last recession, partners predict a string of smaller M&A deals, as corporates seek to snap up weaker rivals, in addition to financial services mandates and restructurings, with the equity markets, at least across Europe, remaining relatively closed.

As Linklaters corporate partner Charlie Jacobs comments: "In Europe, people have virtually given up on this year, to be honest. There are M&A deals around, but few are pushing them pre-year end. I am more optimistic about M&A for 2012. It typically won't be 'mega deals' but acquisitions and spin-offs in sectors such as natural resources and financial institutions. Strong corporates will acquire weaker competitors.

"The main impact of the eurozone crisis for law firms will inevitably be on activity levels. People just want certainty and, without it, the drop in market activity is going to hurt law firm revenues," he adds.

Norton Rose banking head Jeremy Edwards sums up: "2012 will not be the end of the world, but we are looking at another challenging year. The banking department will not have as good a year as disputes, but it will be better than corporate. I feel bad for my colleagues in corporate under these circumstances."

With several large firms, including Linklaters, already looking to reduce their equity partnerships in anticipation of falling activity levels in the New Year and increased pressure on fees, cost cutting measures will return to the limelight. In addition to partnership restructurings and potentially associate redundancies, this is likely to mean greater emphasis on added-value services and legal process outsourcing.

White & Case's Brettle comments: "I predict that law firms will become increasingly client-centric – firms will become more sophisticated in billing practices and more innovative when it comes to driving down costs."

Meanwhile, increased competition and falling revenues are expected to lead to further consolidation in the legal market. 2011 has seen a number of sizeable law firm mergers and acquisitions, with the likes of Barlow Lyde & Gilbert and Clyde & Co and Davies Arnold Cooper and Beachcroft among those tying the knot in the UK. Meanwhile, further afield, Ashurst, DLA Piper and Squire Sanders Hammonds are among those to agree tie-ups with firms or individual offices in Australia, with experts predicting further expansion into Asia-Pacific, 
Canada and BRIC economies throughout 2012.

Jomati Consultants principal Tony Williams comments: "We can expect to see more domestic and international mergers. Larger firms will be looking to broaden and deepen their coverage in international growth markets where their clients focus. Firms with clear strategies and determined execution will pull ahead as they steal market share from undifferentiated or drifting firms."

In a week that has seen Standard & Poor's threaten to downgrade the rating of a number of AAA eurozone nations, including France and Germany, many partners argue that for most large firms it will no longer be enough for firms' international practices to be focused on Europe.

As DLA Piper joint chief executive and managing partner Nigel Knowles (pictured, main) concludes: "Those firms that don't have a clear strategic rationale, a breadth of offering or an international footprint will be left extremely vulnerable. It is important to remember that there is a world outside Continental Europe that continues to enjoy significant economic growth while, at the same time, offering exciting opportunities to those firms that are already well established in these regions."

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