The economic crisis has forced a rethink in hiring strategies, with firms less willing to take a chance on new recruits than before, say Andrew Caulfield and Ian Holloway

Partnership used to be for life as a general rule – barring exceptional circumstances. This meant that any moves between law firms in a partner's career were the exception, rather than the rule. 

And then the world changed. The impact on major and mid-tier law firms, and by implication the outlook of their top talent, has been significant and has continued to shift in response to a range of macro and micro situational indicators.

Over the past 25 years, there have been many contributory macro-economic, corporate and political factors to contend with: a technological revolution; the huge expansion of law firms into global businesses; the advent of the US firms' threat to City firms from the late 1990s onwards; and, most recently, the global credit crunch. 

The failure of Lehman Brothers – leading as it did to economic stagnation and an accompanying heightened regulatory environment that remains today – the eurozone crisis, and political 'trade-offs' between governments and the International Monetary Fund over the merits or demerits of the austerity agenda caused markets and currencies to fluctuate hugely. 

As a result of this challenging environment, at a micro level, issues within firms include declining profitability and pay; dissatisfaction with existing management; a sense of absence of strategy to navigate troubled times; lack of sector focus or globalisation; lack of a true partnership model; and the once unheard of spectre of partnership 'culls'. 

These factors have contributed towards a new environment in which many firms have to realign themselves to stand a chance of developing their ongoing and future business models. In this rapidly developing global landscape, there are now more partners talking to firms across the London market than ever before. 

Perhaps in contrast with boom times, a high volume of the partners we speak to tell us that, even if they are content in their position at their current firm, it would be naive in today's climate not to be aware of the options around them. 

Slash and burn

All in all, the world has changed radically for partners. The well-documented partner culls (euphemistically termed 'performance management initiatives') across some of the City's biggest firms shocked the legal community and have left a lasting legacy. Plateau equity partners at top firms, who previously brushed aside headhunters and acquisitive firms' offers for many years, now face the prospect of either significant pay cuts or of trying to find new roles in a more hostile, austere market.

The same is true all the way down the partner ranks – from disaffected junior equity partners demanding more points, to the ever-growing band of 'blocked' income or fixed-share partners who are finding their anticipated invitation to the top table deferred due to market conditions. 

This also extends further down the scale to senior associates whose track to partnership is frequently extended more than ever before, and in some instances never materialises. Mid-level associates ought to look at the log-jam ahead of them to assess how realistic their prospects will be based on their more senior colleagues' progress. 

Meanwhile, increasingly only those partners who are realistic about their compensation levels are finding suitable new roles, as hiring firms are now much more cautious, with the due diligence being done on business cases and assessments of realistic contributions more stringent than ever. 

Creative business plans and claims of huge followings are more carefully dissected now than in the boom years. The desire to 'take a punt' has long since gone.

The new normal

We all remain concerned about prevailing and future economic conditions. Indeed, a number of senior lawyers even talk anecdotally of being only half way through a 10-year recession. Governments and other global bodies now realise the depth of the economic gloom, and have responded by offering greater financial support in a bid to boost confidence and prevent conditions from worsening. Whether they have acted sufficiently quickly or proactively remains to be seen. 

Recent data demonstrates a concerning lack of M&A activity. Figures released in March by the Office for National Statistics shows a significant and ongoing decline in M&A activity. The number of deals with UK companies buying foreign companies fell from 286 in 2011 to 107 in 2012. The number of deals where foreign companies bought UK companies fell from 237 in 2011 to 155 in 2012. And the number of deals where UK companies bought other UK companies fell from 373 in 2011, to 255 last year. 

A comparison with numbers in 2007 is even starker – for the categories set out above the 2007 volumes were 441, 269 and 869 respectively. 

The impact on the legal world is clearly significant. This data not only illustrates a lack of work for corporate lawyers, but also for major support areas such as employment, tax, benefits and pensions. Since the structure of many leading City firms is built on either finance or corporate transactional capability, we are hearing partners talking of repositioning efforts within firms, to gain a greater foothold in areas such as litigation, which may not have been as important to them historically. 

We have therefore seen an increasing flow of corporate, finance and support services lawyers entering the recruitment market in recent months. Meanwhile, the changing market conditions mean that it is now litigators and regulatory lawyers who are in high demand – in some cases, leading to top-level moves at very high prices.

Across the broad spectrum of UK firms, many are struggling as the transactional downturn continues. As the weekly stories attest, mergers are top of the agenda for many, and it is likely that this trend will continue, with further consolidation to come over the next few years. 

Many firms are merging defensively to ride out the downturn; others to increase their international reach in an effort to spread the risk across different geographical markets – and there are even perhaps some strategic acquisitions by strong practices looking to take advantage of weaker competitors.

Opportunity knocks

Yet in spite of this hostile environment, a number of US firms – and some of the stronger UK ones – are still keen to grow key practice areas through the addition of top talent at partner level. For example, as the energy market is one of only a few active transactional sectors, it is the current focus of growth for some of the industry's big players. 

There is also a smaller degree of movement around discrete sector-focused needs in corporate and finance. Litigation and international arbitration areas remain extremely busy. But while firms talk of adding in these areas, business case and following is often an issue. 

In contrast, white collar crime and Bribery Act capability is the current trend – with a number of Serious Fraud Office moves to US firms, and partners from niche firms increasingly moving to bigger US and City firms to build their practices in these areas.

While the world remains in a state of uncertainty – particularly in the UK and Europe, where we await concerted signs of the infamous (and so far elusive) 'green shoots' of recovery – partners need to be realistic about their expectations. A blanket approach across the market no longer suffices. There need to be sensible targets and tailored approaches made to firms based on realistic aspirations. 

Andrew Caulfield is a headhunter and Ian Holloway is head of City practice – legal at Badenoch & Clark Executive Search.