A good recession: Why the recession is good for law firms

P.G. Wodehouse once observed that it is never difficult to distinguish between a Scotsman with a grievance and a ray of sunshine. True to my Celtic roots – and as my fellow partners will no doubt attest – I am not prone to bouts of unrealistic or unwarranted optimism. Nevertheless, I am increasingly inclined to the view that posterity may well yet reflect the current recession in a positive light, at least as far as the UK legal sector is concerned.

It might be regarded as something of an understatement to say that the period since 2007 has been a tough one for law firms and, of course, for very many of their clients.

In the heady pre-recession days when work formed an orderly and seemingly endless queue outside the doors of most large law firms, lawyers at all levels were used to working with a degree of freneticism which, if anything, left rather too little time for proper reflection. For most, realising the notion of work/life balance was about as likely as winning the Euro Millions lottery.

Driven by cheap and readily-available capital in the market and the associated high volumes of transactional activity, particularly in the corporate arena, law firm revenues and profits appeared to be on a relentless, and seemingly guaranteed, upward progression – much like, indeed, the real estate market upon which many of those revenues were predicated. Regular and predictable deal flows made budgeting a simple art. Costs appeared to require, and often received, little real scrutiny.

The onset of the recession certainly changed all of that. Compared to the relative stability of those bygone days, we lawyers can now be said to live and work in truly extraordinary times. An enduring and painful recession, easily the deepest in living memory, is part only of a wider picture of external influences which have been brought to bear on the legal sector in recent years.

Seismic changes

A report by Espirito Santo Financial Group set the tone for the debate in concluding that the perfect storm is brewing for the legal sector. “It will cause a seismic reappraisal of LLP partnership strategies as lawyers have simply never had to face the full forces of the market before now,” it said. It is difficult to disagree.

The Legal Services Act is now very much a reality. Deregulation will surely strip away the last vestiges of protectionism and expose the legal profession to the full forces of the market for the first time.

Duke Street Capital’s acquisition of a majority stake in Parabis Group set the ball in motion. The Solicitors Regulation Authority’s recent approval of Irwin Mitchell’s application for multiple alternative business structures merely reinforces the direction of travel. Although many firms are still in ‘wait and see’ mode, it seems certain that external investment will become a significant driver for change over the next few years.

At the same time, there is increasing commoditisation of legal services, coupled with significant pricing pressures from clients. Commoditisation is a much-used word and clearly means different things to different people. The better expression perhaps would be ‘commodity priced’.

We, as lawyers, have a view on what constitutes commodity work in our respective fields of practice and, naturally enough, that view is likely to be better informed, and therefore more accurate, than the view of any external observer. This is all well and good, except that, in the final analysis, it really does not matter one jot.

If the client, rightly or wrongly, has come to the view that a particular service is a commodity offer, then the chances are that he will only ever be prepared to pay a commodity price for that service and the moral high ground will be a rather pointless and ultimately unproductive place to occupy.

At the same time, the pricing of legal services has been for a number of years now, and continues to be, something of an ungrasped nettle. There is probably no single solution, but what we can be certain of is that any residual affection amongst general counsel for hourly charge-out rates is rapidly dissipating. It would also, I think, be dangerously naïve for any firm to set its strategy on the assumption that, when the recession eases, so too will pricing pressure.

The demographics of the profession are changing too, with substantially more women entering the profession now than men. The impact on any professional services business of having to cope with a number of maternity leaves occurring at the same time is not insignificant. But, if law firms want to attract and retain the best talent, then solutions which balance the needs of clients and the business with an appropriate degree of flexibility have to be found.

For those firms, like mine, with a presence in Scotland, there is the added complication of the spectre of Scottish independence and a disunited Kingdom. Whether the outcome be independence, devolution max or the status quo, it will not necessarily affect the structure of our business as a UK national law firm. But, it will, inevitably, impact directly on many of our national and international clients and therefore on how we align our services to best meet their needs.

In other, more tranquil times, any one of these factors in isolation might have sent unsettling tremors through the profession, but together they constitute a tsunami that threatens to change the legal landscape beyond all recognition. Not every law firm will survive, let alone thrive, in this ‘new normal’.

Getting prepared

And so, against that whole background why, you might reasonably ask, do I think the recession may in any sense come to be regarded as a positive thing? The answer is straightforward.

I started out in the law in 1981. It was a very different profession then. The sort of technology we take for granted nowadays was virtually unheard of. Correspondence was still largely by letter, allowing more time for proper reflection on the issues – not a bad thing perhaps when what the client is paying all that money for is intellectual content.

Time recording was the exception rather than the rule. Clients were enduringly loyal and pricing by reference to hourly rates was in many – if not all – instances simply not an issue.

It was not an easier job, nor in any sense a lesser shift. On the contrary, the acceptance of the need for long hours was more widespread then than it appears to be among the younger generation of lawyers now. But, the pressures were very different.

What characterised legal practice then was stability. However, that stability was not the product of a profession operating at the cutting edge of commercial practice. Rather, it was the consequence of a basket of less defensible reasons, including a trading environment artificially sheltered from the harsh realities of market forces, conservatism, complacency and a widespread belief bordering on arrogance that the law was simply too important to be trammelled by grubby considerations of commercialism.

Consequently, while that stability brought considerable benefits in the short term, it did nothing to prepare the profession for where we are now. Perhaps even more damagingly, it allowed other professions, notably the accountants and surveyors, to supplant lawyers in the ‘man of business’ role in the eyes of our clients.

There was little in the way of genuine innovation for the simple reason that there was really not much need for it in a situation where doing what had been done before the way it had been done before was good enough.

The recession and the dawning realisation that, when it finally relaxes its grip on the economy, the world will have changed irrevocably and life in the law will not simply revert to where it left off, paint the legal sector in an entirely new and different colour.

And that, in my view, is a resolutely good thing for the future of the profession. To be clear, I am not in the doomsday camp that regards the legal sector as a spent force. Quite the reverse – I think the profession has as bright a future now as it has ever had.

Lawyers, of course, remain intelligent, analytical and articulate people who, properly provisioned, should be every bit as capable of running successful businesses in the future as professionals in other disciplines.

Periods of stability provide much less in the way of opportunity than periods of change. In a period of substantial and rapid change such as the one we now face, those opportunities are all the greater. And, for those firms that can properly equip themselves for the ‘new normal’, the opportunities are there for the taking.

What the recession has usefully done is to demand that, as a prerequisite of future success, law firms go through a process of self-examination, to establish whether they are indeed properly equipped, and to undergo appropriate self-redefinition if they find that they are not.

It seems likely that one of the consequences of the combination of deregulation and the fundamental shift in the demand for legal services since the start of the recession is that there will be much more evidence of polarity on either side of the ‘commodity line’ – in other words, the high volume/low margin space on the one hand and the quality work/premium fee space on the other.

For many firms (and particularly those in the squeezed middle) bent on a path of scaling revenues in the expectation that profits would follow, that line has become blurred.

Historical circumstances may have conspired to create the illusion that law firms could do all things for all clients at any price, but that is surely what it is – an illusion that is unsustainable in a more competitive, commercially-focused environment.

And so, much as our grandparents’ generation might have wrestled with the counter-intuitive notion of a good war, lawyers may be asked in years to come whether they had a good recession. Let’s hope they can answer that in the affirmative.

Chris Smylie is the chief executive of Scottish law firm Maclay Murray & Spens (www.mms.co.uk)

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