Few can predict just what a recovered legal sector will look like in London, nor even if it will ever actually occur, writes Angela Priestley

In 2009, the news of redundancies from some of London's largest law firms is constant. The bubble of London's once burgeoning legal services market that struggled to find enough talent to service its demand has well and truly burst.

The mood among the legal community is sombre. For some, it may err on the side of cautiously optimistic. For others, it's merely a sense of trepidation. Gone are the days when the constant churn of activity burned through the adrenalin of deal-hungry young lawyers - the days when London was the hub of some of the globe's most highly regarded transactions. These days, young lawyers in London should consider themselves lucky to have a job.

While redundancy rounds in Australian law firms have rarely exceeded 20 lawyers, in London they frequently exceeded the 100 mark. Meanwhile, Legal Week reports that the profits per equity partner (PEP) earnings in London have dropped substantially at most of the region's largest firms. The PEP figures at Clifford Chance for example - which fell by 37 per cent in the 2008-09 financial year - provide a drastic reminder of the new reality in which the market finds itself.

London law firms have learnt the hard way the limitations of their once ever-expanding empires - that what scales up to unimagined heights must inevitably scale back down.

A cautionary tale of optimism

Law firms contacted by Lawyers Weekly for this report revealed that there were numerous challenges facing their sector but that, ultimately, they believe things would turn for the better. Outside the law firms though, the sense of optimism was not quite as strong.

"I sense no real optimism at all," says David Holme, director of Exigent, a global legal process outsourcing provider. Instead, Holme foresees a new era of intense competition that will no doubt require any law firm intent on remaining relevant in the future London legal services sector to wise up. "All firms are facing increased competition, lower absolute volumes, fixed fees and fee deflation," he says.

"There is no real sense that this will change in the near term. Significant firms have had cash calls on equity partners for sizeable sums and there is uncertainty about what will happen next."

For Holme's business, and indeed any outsourcing provider with ties in the legal sector, the move by law firms to slash costs and make numerous redundancies across their operations is providing for a considerable increase in outsourcing work. By outsourcing processes such as word processing, proof reading, document review and litigation support, firms are discovering that certain workflows can still be completed once they slash their headcounts. In the past, following a recession the market inevitably bounces back the other way - requiring firms to again compete for talent. This time, though, given advancements in technology, there are many positions that may never be replaced.

The hits and the misses

There are few surprises in the practice areas of London firms that are suffering, or thriving, in the current economic conditions. As a snapshot, Eversheds reports litigation and dispute management, employment competition and restructuring as being particularly busy. Slaughter & May says financing and restructuring as well as dispute resolution are thriving - while also claiming good levels of activity in the corporate, pensions, employment and competition groups. At Linklaters, restructuring and insolvency, plus financial regulatory, projects, equity and debt capital markets are busy, while even mergers and acquisitions - in the context of recapitalisations and restructuring - is still a strong growth area.

Reduced levels of activity at investment banks coupled with the shrinking size of departments within investment banks - particularly in capital markets - have heavily impacted on the commercial market. According to Graham White, executive partner at Slaughter & May, lawyers in such markets need to adapt. "Changes in areas of activity have required lawyers to be more flexible and adaptable since many are being called upon to handle types of work and provide advice in areas which have not been their specialty in the past," he says.

Julia Puntoriero, a senior consultant at EJ Legal, believes that the 20 firms that are predominantly corporate, banking and property-focussed have been hit hardest by the fallout in M&A, finance and large real estate deals. "They are laying off both partners and assistants in most areas - not just those most affected by the downturn - as they do their best to cut costs to shore up collapsing profits," she says.

But, notes Puntoriero, larger firms with wider international spreads seem to be weathering the storm better than those focused solely on the UK market - especially the US and UK firms with substantial arbitration and dispute resolution practices.

As for the smaller firms, Puntoriero places them in two camps: those that have weathered the storm and that will thrive on an upturn, and those that have lost their confidence and are finding their partners opening up to the possibilities of merger discussions.

The first camp, she says, is seeing the downturn as an opportunity to attract partners and teams that have fallen out of, or are choosing to leave, the larger firms together with their personal clients - ultimately offering these firms the ability to offer clients lower charge-out rates with highly experienced partners.

"On the other hand there are the smaller and medium-sized firms who reckon that the end of the world is nigh," says Puntoriero. In these firms, recruitment and growth has stopped altogether as they concentrate all their resources on retaining the clients they already have. "For these firms the future is bleak," she adds. "Partners whose clients are thriving tend not to hang around in these firms ... Mergers are the ultimate release from the vicious circle - but they must initiate discussions before it is too late."

Consolidation may just be the order of the day, with firms looking to place their weakening practices on the market. A recent survey by Legal Week of 87 partners found that 68 per cent believe current economic conditions will present opportunities for domestic mergers, another 28 per cent said mergers might occur, while only 4 per cent said they believe such deals would be unlikely.

Adapting for better relations

No matter which firms survive the challenges of the current climate, it's likely the future landscape of the London legal sector will look considerably different to that of the past.

Holmes believes that the legal services industry found itself in an overinflated bubble and that its subsequent burst can simply not be reversed. The overcapacity of lawyers and their inflated fees, he says, must now face the prospect of in-house counsel demanding minimal partner contact times and cheaper fees - all in the context of a smaller overall market.

So lawyers need to smarten up. Andrew Lilley, head of employment and incoming managing partner of Travers Smith, says client relationship skills are essential in the current market - skills that some lawyers, after working on a seemingly endless parade of transactions for so many years - may find require some fine-tuning.

"A client once said to me a couple of months ago: 'What I want out of my lawyer is to know that they are thinking about me, when I am not thinking about them,' and that's exactly it. That's what they want to know," says Lilley. "It's not good enough to sit and wait for the phone to ring for the next deal to come through, you've got to be doing more than that."

Lilley believes these skills already exist in most lawyers, but that they must learn to deal with the changing pace of what the business community is demanding of them. "If you have so many deals being thrown at you for years, all you want to do is get one off the desk before the next one comes along," he says. "Well, then your client management skills haven't really been tested as much as they should have been because they were clamouring at your door. Of course now, it's turned the other way."

At Linklaters, partner Annette Kurdian agrees that clients are demanding more: "Clients are increasingly cost-conscious which has meant that law firms need to be even more focused on delivering value adding work in a cost-effective manner," she says, noting that some clients are even demanding their law firms provide them with leads to new work. "In this way, we see an even more symbiotic relationship with clients."

The eventual rebound

For those at the heart of the London legal market, there is no "if" about the market again picking up, but rather a "when". Some believe that, already, the signs of an uptick in work are stirring.

White says that at Slaughter & May the corporate finance and private equity teams - which had been the most drastically hit by the market conditions - have seen more deal activity in the last couple of months. He admits that he's not sure if it's merely a coincidence of timing or an indicator of something more sustained. Still, the signs are encouraging. At Eversheds, chief executive Bryan Hughes notes that performance in the new financial year so far, has also been encouraging, with activity levels broadly on budget.

Tim Fogarty, a recruiter at Taylor Root, is confident that the market needs to shift only subtly for a massive upswing to occur and the appetite for recruitment to return. "It would take one large M&A matter that would keep three or four London firms busy and numerous law firms in other parts of the world busy - then the tidal wave of demand will be created," he says.

Meanwhile, there are already some beacons of hope in the London legal market offering reasons to believe that, indeed, the market may very well return to its fruitful days. Freshfields has actually seen its revenue grow by 9 per cent in the 2008-09 financial year, while at the same time reporting that their PEP remained steady. Just how they did it, remains to be seen, but Tim Jones, London managing partner at Freshfields offers a small hint, explaining that "flexibility and creative thinking are especially important skills for lawyers in the current market".

Holan Fenwick Willan, a smaller firm with a strong stake in the shipping world, also remains resilient against the lack of demand for transactional work, with a spokesperson telling Lawyers Weekly the firm is now mobilising for the upturn: "It's our view that any well-hedged firm should continue to invest in both contentious and non-contentious capabilities in preparation for economic recovery, as and when it does happen."

Creative thinking might just be the key: As Holme says, it's the law firms that find the best solutions to the region's current circumstances that will eventually emerge as clear winners in the future. "It is, however, far from clear which those will be," he says, "and there will be a much larger group of losers."