The sharp fall in associate attrition will cause major headaches for City deal teams, writes Suzanna Ring

"Why won't they just go?!" says one partner, privately articulating a topic on the minds of many running deal teams in the City. The topic, of course, is associate attrition. This is always a tricky balancing act for law firms trying to manage the pyramid of associates up to partnership. Too much, as often happens as a result of good times, is a problem – but so is too little.

And the consensus among corporate and banking partners is that associate turnover has sharply fallen in recent months, well below the 15%-20% firms aim for. "Right now we are hovering around the 10% mark and you definitely don't want it to get any lower or you are in problems," says one chief executive of a UK top 50 firm.

Given that law firms are forced to commit to trainee intakes years in advance, this trend always causes internal strife as firms struggle to make space for juniors. The reasons attrition has plunged aren't hard to fathom. When the economy looks gloomy, associates are both less likely to find other jobs and more wary of the risks of moving.

This has been compounded in the UK in that two primary recruiting grounds for good mid-level associates – investment banks and US law firms – are not currently in the market much (US firms' recruitment is currently heavily tilted towards partner level, while many firms now have their own trainee intakes, a development which may in time substantially reduce demand for mid-levels in the City).

Fox Rodney's Siobhan Lewington comments: "The usual glut of associates that would be poached by banks are no longer being approached, as financial institutions continue to have hiring freezes and slim down their in-house teams and replace permanent lawyers with lawyers on temporary contracts. Some firms are trying to counteract this problem by moving associates around into different areas."

Clifford Chance (CC) London corporate head Simon Tinkler (pictured) comments: "Obviously you will always have a proportion of associates who aren't going to make partner here. Some go to smaller firms, but the main attrition is to in-house teams. US firms also notoriously hire associates in downturns, but we have not seen as much of this of late."

herbert-smith-storm-merged-copyThe outbreak of job cuts seen this year – including around 13 redundancies from CC's finance and capital markets practices in April this year and Herbert Smith's 51-strong redundancy round across its City corporate and real estate groups – have been notable responses to plunging attrition.

Indeed, one Herbert Smith partner says that low attrition is "100% of the reason for our associate redundancies". Some argue that the well-publicised woes in Herbert Smith's corporate practice underline the fact that the continued dearth of transactional activity is hitting firms between the magic circle and mid-tier the hardest, as they face competition from both sides and can't comfortably position themselves as premium or value advisers.

Tinkler takes this view: "From a corporate perspective, the firms that will be facing the problem of low associate attrition are those in the chasing pack that are not getting so many of the mandates in the current market."

And fewer mandates usually hit partner promotions. Freshfields Bruckhaus Deringer global corporate head Edward Braham argues that firms generally look beyond short-term market conditions. He comments: "Commercially, you have to keep an eye on maintaining the overall size of the partnership at the right level, but there isn't an absolute cap on partner promotions in any one year, as the decision should always seek to be long term."

But while partnership remains a long-term bet, there is plenty of evidence that the business environment has a material impact on promotions – how could it not, since many firms require prospective partners to put forward a business case? Notably, it has emerged in recent weeks that Linklaters has informally told associates that the firm will likely only make one London partner promotion a year for the next five years in either corporate or private equity – a stance that reflects the lack of deal activity.

Looking at the spread of promotions across the magic circle over the past two years, in 2012 CC and Linklaters both made up two corporate partners in London, while Allen & Overy (A&O) and Freshfields added one corporate partner to their City ranks and Slaughter and May none. Comparing this with 2011, Slaughters made up three in corporate, Linklaters and Freshfields two and A&O and CC added one apiece.

For obvious reasons, there has been a shift towards busier emerging markets, with CC making a third of its promotions in 2012 in Asia, the Middle East and South America. For equally obvious reasons, subdued promotion prospects in the City make a bulging rank of non-moving associates even more problematic for London law firms trying to manage careers.

2009 all over?

Given these ominous signs, the obvious question is whether the current fall in associate attrition which last happened in 2009 will lead to the kind of unprecedented job cuts seen that year. On current conditions, probably not.

Three years ago law firms were struggling to adjust to a sharp drop in activity, after also having built up expensive boom-time cost bases as well as wrestling with the predictable attrition problems. In comparison, firms are in much leaner shape and underlying demand is generally reckoned to be just about flat rather than falling.

As such, the consensus view is that law firms will try to muddle through with the traditional mix of more robust performance management combined with a spate of smaller, targeted redundancies aimed at specific teams.

One corporate practice head from a UK top 10 firm comments: "My impression is that firms are managing out on performance grounds to deal with this issue. Two (not publicly known) have said as much, or held small redundancy programmes below the maximum which triggers formal consultation."

Clearly, this problem isn't going away soon.