Examining the impact of the double dip recession on UK law firms

On the 25 April 2012 the UK returned to recession after shrinking by 0.2% in the first three months of 2012. There had been much speculation in the press over previous months that the UK was heading for a double dip recession. This was further exacerbated in July 2012 when a shock 0.7% fall in UK GDP deepened the double-dip recession. This surprised analysts who had expected a 0.2% drop. So how will the recession impact UK law firms.[1]

Recession 2008

The legal profession likes to think of itself as recession proof and, to an extent, it is. It may be a generalisation but during economic boom times, law firms will grow advising on large commercial transactions, mergers and acquisitions etc; while in the “bust” times, law firms can profit from representing clients litigating over who’s to blame for their financial difficulties.

The effect of the recession in 2008 was severe on commercial law firms.[2] Law firms with large property departments suffered as deals dried up. M&A and finance-related work also slowed dramatically. Other firms were able to reinforce their insolvency practices. The collapse of major institutions such as Lehman Brothers automatically resulted in a slew of legal work, and the top British and American firms have raked in millions in fees on large restructuring and insolvency proceedings. Meanwhile, those firms that had always focused less on transactional work and more on litigation held up reasonably well. An example of this is that it has been well documented in the press that there is often an increase in personal injury litigation during periods of an economic downturn.[3]

That is not to say that law firms have had it all their own way. Studies and the media[4] have suggested that in the aftermath of the 2008 recession, many married couples found themselves unable to afford to divorce, as job loses, house prices and investments fell in value, and so couples stayed together contributing to a dramatic fall in divorce rates.[5] Indeed, as the UK climbed out of recession, following the “green shoots” of recovery in 2010, there followed an equally dramatic rise in the divorce rate for the first time since 2003.[6]

To begin with we should look at what law firms did in the immediate aftermath of the last recession. Most firms sought to trim costs through relatively minor measures, such as deferring start dates on training contracts, bringing in four-day working weeks, and eventually some redundancies (albeit not in the same scale as other industries) with what has been previously reported as very healthy redundancy packages for those members of staff who left.

Will this be repeated in the current double dip recession? It would be difficult to think that it will following three years of near-stagnant market conditions leaving many law firms severely weakened.

“Lawyers rely on activity. What hurts them isn’t boom or bust, but market paralysis”… a substantial number of firms are currently “hanging on by their fingertips”.

– Tony Williams, the former managing partner of Clifford Chance, who now heads legal consultancy Jomati.

The double dip would, at best, force struggling firms into a succession of mergers with each other, which would no doubt lead to job cuts. Research by the Law Consultancy Network suggests that a high proportion of small and medium-sized firms have completed mergers in the first half of 2011.[7]

John Quinn, the founding partner of Quinn Emanuel, opined[8] that the merger of US firm Squire Sanders and UK firm Hammonds was a case of two rocks that think if they hug each other tight enough they wont sink. It appears that many firms have decided that there is strength in numbers. For example, it certainly makes sense for two firms with similar practices to merge, thereby reducing overheads and creating a stronger combined firm. This exact scenario happened with insurance-focused firms Clyde & Co and Barlow Lyde & Gilbert in 2011.

At worst, the double dip could see a whole host of firms being forced to close their doors such as in the case of Halliwells which remain the one major law firm to collapse so far. Halliwells was bringing in millions of pounds in revenue. A logical and reasonable question to ask is: Will every firm currently billing still exist in a year’s time? In such an environment, can we really expect law firms to be making trainee deferral payments, reduced-hour working schemes or lavish redundancy packages for the staff?

Arguably the biggest impact will be felt amongst the graduate market. Whereas previously the legal profession was seen as a safe option for a career this is clearly no longer the case. As a result of the recession many firms have noticed that many of the functions performed by lawyers can in fact now be dealt with by legal software. Those tasks that cannot be achieved this way and still require a human presence may, in the opinion of the UK law firm, may not require a trainee at approximately £40,000 or even a paralegal at £20,000.[9]

London firm Farrer & Co, currently takes on ten trainees a year and is an example of a law firm in solid shape. Former senior partner James Furber says he would be “very worried” if Farrer only specialised in commercial property or banking work, as is effectively the case with many City law firms.

Whatever happens in the world, people are still dying, still making wills, and still getting divorced. Happily, were positioned to benefit from that.

So what can we expect?

Broadly speaking, since the 2008 recession law firms have become more streamlined and have taken the steps to diversify their practices, and so they should theoretically at least be much better placed to withstand the double-dip.

However even if law firms do diversify and not specialise in only a few niche areas there are still fears that if the big banks and corporate entities lose confidence as they did in 2008, then the major transactions relied upon by many law firms will once again dry up. Clients have taken stock of the fees charged by law firms, and as their own budgets become squeezed so they will look around for the best value for money. As a result more firms may be forced to re-examine their business models through mergers or perhaps even being able to draw on outside investment by becoming an Alternative Business Structure.[10] Smaller measures may include a change to their billing models whereby they charge a fixed fee for a conveyance or a matrimonial matter, rather than by the traditional hour method.

Globalisation will allow many City law firms and national firms to outsource low-level tasks, such as document review or administrative work to countries such as India and South Africa and obtain cost savings as a result. Law firms who are currently ahead of the rest of the legal profession including Eversheds and the Parabis Group. Catherine Baksi believes that outsourcing is ‘key’ to the survival of many UK law firms, but a present a lot of them are failing to act.[11]

In conclusion…

Has there been a realisation in the legal profession that the market for legal services has fundamentally changed in a world suddenly stifled by debt? Perhaps only time will tell. In order to survive and prosper law firms will have to re-evaluate what they do, where, for whom and at what price. Law firms will need to be leaner and meaner than ever before. As Alex Aldridge writes in the Guardian:

Of course, recessions, like riots, dont last forever. And when they pass, the survivors usually find themselves well-placed to thrive as the economy picks up again.[12]

[1] ‘UK economy in double dip recession’ BBC 25 April 2012

[2] ‘The recession and it’s effect on the legal profession’ by Chambers Student

[3] ‘Is the recession to blame for the surge in no win no fee claims’ by Arti Vasoo

[4] ‘Recession Reality Bites For Divorcing British Couples’ by Fiona Wood, Family lawyer and Partner at Pannone LLP in The Huffington Post 9 December 2011

[5] ‘Divorce rates fall to 29-year low’ by Harry Wallop The Telegraph 28 January 2010

[6] ‘Til debt us do part: recession blamed for rise in divorce’ rate by Tom Peck in The Independent 9 December 2011

[7] ‘Law firms mergers trend to accelerate’ by Catherine Baksi in the Law Gazette 4 August 2011

[8] ‘Above the Law’s Tweet of the Day: John Quinn on a possible Squire Sanders/Hammonds’ merger 3 September 2010

[9] ‘The recession and it’s effect on the legal profession’ by Chambers Student

[10] ‘Private equity enters the law as Wagamama owner buys Parabis Group’ in Legal Futures on the 6 February 2012

[11] ‘Many law firms remain ‘reluctant’ to outsource’ by Catherine Baksi on 5 October 2011

[12] ‘Law firms fear for double dip recession’ by Alex Aldridge in The Guardian 11 August 2011