Is it realistic for London firms to hope for a return to the pre-GFC glory days or has the legal market changed for good? Leanne Mezrani reports.

Firms in London are finally starting to worry about Europe’s financial woes.

In what appears to be a delayed reaction, many firms are now admitting that the market for legal services is unlikely to recover anytime soon in an economic climate stifled by debt.

Why has it taken so long for firms in the UK to replace their sunny disposition with one of doom and gloom? Probably because many believe law firms are recession proof and, to a certain extent, they are.

When the economy is doing well, firms clean up on big deals; should a downturn hit, these same firms make money representing clients in disputes over who’s to blame. So when Lehman Brothers investment bank collapsed in 2008, the biggest bankruptcy in the world to date, the UK’s Magic Circle enjoyed a relatively strong flow of insolvency and restructuring work and wondered why the rest of the corporate world panicked.

But, after four years of almost stagnant market conditions, London’s top firms are finding they must chop staff numbers to remain competitive.

Some tried to resist going down the redundancy route, like Birmingham-based Wragge & Co, which instead tried to defer the start dates of its graduate recruits. The firm had written to the trainees offering £5000 if they deferred their places until September 2013. But Wragge & Co has since revealed that none of its trainees took up the offer, so all will start at the firm this month.

Norton Rose took a different approach to avoid job cuts. The firm launched a flexi-working scheme, since shelved, which saw staff earn 85 per cent of their salary for a four-day week, while a four-to-12 week sabbatical option would be paid at 30 per cent of their base salary.

Some months have passed since these “soft” measures were taken. Since then a number of firms have shed jobs, with Herbert Smith the latest to follow through on its redundancy consultation conducted in April. The firm recently axed 43-and-a-half full-time-equivalent jobs in London, claiming all affected fee-earners and staff took voluntary redundancy, which also happened when the firm made 84 redundancies in 2009.

While job cuts are hard to swallow, it may be exactly what the legal industry in London needs.

Too many cooks

A new report from the Royal Bank of Scotland claims that the UK legal market is suffering from substantial over-capacity and is currently carrying more than 5000 excess solicitor jobs.

Sustained low demand and the entry of new players under the Legal Services Act have caused a “permanent structural change in market forces in the UK”, states the report, which also points to an “opportunity” to remove five per cent of the fee-earner base at a saving of around £280 million in annual costs for the UK legal profession.

James Tsolakis, head of law firm banking at the Royal Bank of Scotland, says the report presents a “good case to take out five per cent of fee earners to put the profession on more stable levels of profitability”. He also claims that many partnerships are in denial about the challenges facing the profession.

It seems Tsolakis may be right. Despite warnings that the market is inundated with lawyers, managing director of recruiter EA International reveals that many firms are still hiring. Maciek Motylinski admits that there aren’t nearly as many job offers around as the pre-GFC glory days but, he adds, his recruitment company is still getting a steady flow of requests for candidates from the London firms.

“Rather than getting a bum on a seat because they’re inundated with work, firms are hiring strategically,” he says.

And it seems that London’s top firms are willing to travel to Australia for talent.

Motylinski reveals that EA International has conducted recruitment campaigns for a number of UK firms in recent years, including Freshfields, Herbert Smith and Clifford Chance. The latest was for Linklaters, which snapped up 21 new lawyers from Australia and New Zealand in 2011.

“London law firms come here looking for talent because they won’t find equally good lawyers in their local market,” claims Motylinski.

 “When [firms] are looking to hire in significant numbers, there’s a ready, willing and able pool of exceptional lawyers in Australia and New Zealand who want to take a step up in their careers.”

Of those being recruited, Motylinski claims the “sweet spot” is Australian lawyers with two to six years’ experience, with more experienced lawyers tending to price themselves out of the market.

Slaughter and May is one of the two remaining Magic Circle firms that doesn’t have a presence in Australia but continues to recruit a reasonable number of Australian lawyers. The firm’s senior partner in London, Christopher Saul, says Australian lawyers are in demand because “they are not only excellent in terms of legal skills but also great team players”.

“Australian lawyers are very well regarded in London,” he adds.

Australian lawyers, in turn, are attracted to the cross-border work offered by Slaughter and May, which has among its clients BHP Billiton, Cemex, Diageo, GE and Goldman Sachs.

Despite having just four offices (London, Brussels, Hong Kong and Beijing), Saul says the firm’s variety of international legal work not only attracts lawyers from around the world but is also responsible for cementing Slaughter and May’s place in the UK’s elite Magic Circle.

Independents day

While the firm has no plans to expand into Australia, either via a merger or an overseas office, Saul says that Slaughter and May has been observing merger activity in Australia with interest.

The firm looks to independents such as Clayton Utz, Corrs Chambers Westgarth, Gilbert + Tobin and Minter Ellison as its favoured partners in Australia, ending a non-exclusive referral arrangement with Allens, which is now seen as a competitor in the wake of the Linklaters deal.

“Our strategy is to work with the leading independent firms in Australia,” says Saul. “The process of consolidation of some Australian firms with overseas firms will bring an increasing array of opportunities to the Australian independents.”

Michael Wallin, the head of Minter Ellison’s London office, confirms that referrals have increased off the back Slaughter and May’s decision. He believes the firm’s decision not to merge is, for now, working in its favour.

“Our independence is serving us really well at the moment,” he says. In fact, some in London are at a loss as to why certain firms have entered into international mergers, he adds.

While there are obvious benefits to working for a merged firm, including greater opportunities for Australian lawyers to work overseas, Wallin warns that regulatory changes have made the requalification process in the UK slightly tougher.

Starting this month, foreign lawyers looking to requalify as a solicitor in England and Wales are being considered under new Qualified Lawyers Transfer Scheme Rules developed by the Solicitors Regulation Authority. One of the key updates is the removal of experience as part of the selection criteria, which has been replaced by practical exercises to test a potential lawyer’s aptitude.

Wallin says requalification is now “more intensive”, but is unlikely to act as a deterrent to lawyers moving to London.

Motylinski agrees that Australian lawyers are still travelling to London despite perceived challenges. Continuing demand for candidates – albeit reduced – is partly due to an uptick in work in the financial services regulatory space.

Cautious optimism

“There has been a burst in high-end litigation work as a lot of creditors go out seeking to get their money back,” says Motylinski. He indicates that insolvency lawyers have also been enjoying a reasonably steady workflow this year.

Saul points to dispute resolution as another area that is sending an increasing volume of work Slaughter and May’s way. He credits continued demand for dispute resolution services, in part, to the attractiveness of English contract law.

English law is seen to provide commercial certainty in its approach to the construction of contracts, which is complemented by a willingness of judges to allow for flexibility in interpretation, Saul explains. This can include, for example, court consideration of the commercial context in which the contract was made.

“These factors, together with the high quality of English judges, mean that London’s legal market will, I believe, continue to have very good prospects for success,” he says.

Saul’s prediction isn’t just blind optimism. London saw a post-Olympic boom last month, as private sector firms enjoyed their fastest growth since March. Services firms are seeing an unbroken nine-month run of growth, despite the UK sinking into a double-dip recession. According to the Lloyds TSB Commercial/Market Activity Index Survey, where a score above 50 signals expansion, London jumped from 51.6 to 54.9 during August.

These sorts of figures are heartening for lawyers in London who want to believe that the worst is over. But many, understandably, remain cautious.

The Eurozone debt crisis, among other economic challenges, has left businesses wary, says Motylinski, who has just returned from London.

“Demand is purely related to the level of deal activity,” he says, referring to the M&A market, in which the level of work remains “incredibly low”.

Wallin identifies the same trend, adding that that the legal market in London has a long way to go before it’s truly back on its feet.

“It’s a challenging market at the moment, with overall volumes of work across the city of London significantly down,” he says. “Time will tell ... but there are no optimists in London that believe that the European situation will resolve nicely in the short term.”