South West: beating the downturn

'Growth has stopped', says Andrew Perkins, joint managing partner at Exeter-based 16-partner firm Kitson Hutchings about the property market in the South West.

In a tale that has become familiar, developers are stuck with houses they cannot shift and downing tools until the cash starts flowing in again.

Meanwhile conveyancing work grinds to a halt as banks get ever stricter on borrowers, and before long the whole local economy is contaminated.

The response in the South West has been mixed. Regional giant Foot Anstey saw a 50 per cent drop in its residential conveyancing business (though this only represents 5 per cent of the firm's turnover) and made redundancies in its volume department, while medium-size firm Everys, which, with nine offices across the South West, also has a large regional footprint, says the variety of its work and the fact it does not have a volume conveyancing business has offered greater protection.

All however report the same stories. In the property market, the few deals going on take longer, with people dropping their prices and last minute renegotiations causing some transactions to fall through.

The gloom deepens

'There is general lack of confidence which makes many vendors accept last minute changes of price; something they would have not considered a few months ago,' says Perkins. His own firm has been affected and had to lay off staff after a 30 per cent drop in residential conveyancing business.

As residential property dries up, the natural inclination is to turn to commercial property work, which is what the 16-partner firm is doing. The local license and leisure sector in particular, is still active, according to Perkins.

Andrew Lovell, chief executive at 38-partner firm Michelmores, confirms that the commercial property sector, where developers tend to take a longer term view, has so far remained comparatively stable.

On the other hand, there has been a noticeable slump at the firm's London office,where commercial property work has been the main staple. 'There tends to be a ripple effect from the centre, London, and the further you move away from it, the longer it takes for the effect to be felt,' he ponders.

But Perkins says that local commercial sales agents have started reporting a decline in instructions. 'As solicitors, this is likely to hit us in about six to eight weeks,' he says.

Conveyancing factories hit

As in other parts of Britain firms with a large residential conveyancing capability have been particularly badly hit, but not exclusively. Most of the time, those affected are paralegals or support staff, but at Everys, for instance, one property lawyer has been made redundant.

At 58-partner firm Ashfords, those leaving the volume conveyancing arm of the business have not been replaced. The first signs that property was not the only area affected were clearly visible earlier this summer (see Solicitors Journal, 152/27, 8 July 2008). What happened in the South East then is also happening in the South West.

'Family lawyers are affected too, and it is not just paralegals,' says Perkins. 'Likewise in some probate cases.' The reason? If property is not selling, the cash stops flowing in the system. 'Fees are paid once the property has been sold, so if a property is not selling, either in a probate or in a divorce situation, solicitors are not getting paid.'

What, then, are lawyers in the South West doing to counter the downturn.

Countercyclical areas

As always, firms are first looking to exploit areas that typically do better in such circumstances. With the predicted rise in restructuring '“ usually a euphemism for redundancies '“ employment is one of the usual suspects which nobody wants to be missing out on.

'Employment work is already picking up,' says Perkins, who adds that his firm has seen an increase in requests for advice on redundancies from estate agents and other law firms. 'While in the past few years we drafted guidance for employers, our work is now more about litigation.'

At Everys, James Griffin reports a similar trend. 'We are now advising clients not just on litigation but on how to avoid it. Even so, litigationas a whole is also getting busier as individuals and businesses scramble for every penny they believe they are entitled to. We have an awful lot of litigation work, a lot more than normal'.

On the commercial side, Perkins says that demand for insolvency work has boomed and that he expects this kind of work to continue well after we come out of the recession, as bankruptcy cases usually continue to occur at a higher rate two years after a downturn.

Private client is the other area often cited as a fall back because making wills, managing one's assets efficiently, and dying tend to be unaffected by economic cycles.

It represents 25 per cent of Michelmores' revenue and chief executive Andrew Lovell acknowledges there is a slight dip 'but because people do certain things at particular times in their lives there is still a reasonably steady flow of work'.

Likewise at Everys, with James Griffin saying the firm's sizeable workload has been unaffected and that the firm wishes to recruit 'more of the 'right' people'.

At the higher end, Jane Lister, managing partner at Foot Anstey, also says there has been no slow down.

Ian Daniells goes further. 'We have always been keen to remain a full service firm offering both commercial and private client services. Firms that went all commercial probably regret it in times like these.'

Not that cushy

Then there are the more stable but deceptively cushy areas, such as social housing or public sector work.

Michelmores's public sector clients include 15 government agencies, several local authorities and universities. Revenue from this sector represents about half of the firm's commercial property work. 'This sector usually remains stable through economic downturns as the government tends to spend more money to keep things moving,' says Andrew Lovell. 'But it is a very competitive area.'

Ashfords has been growing its public sector portfolio outside the region and is on the panel of a London borough as well as on the Treasury panel, but Daniells warns that it is not only tough getting the work in the first place, making sure it is done cost-efficiently is also critical.

'Increasingly government departments look at fixed price contracts, so we need to make sure we provide the right work at the right price,' he says. 'That presupposes that all our precedents are up to date; that all systems work; that no time is wasted finding things.'

Attractive nevertheless as public sector work may be, comparatively smaller firms like Kitson Hutchings are only able to grab a small portion of this market.

'We do some public work for one of prosecution agency and act for three councils on their debt collection,' says Perkins. Much as it makes sense for the likes of Ashfords and Foot Anstey, Kitson Hutchings is not there yet in terms of size to be able to compete effectively in this market. Even social housing, which can sometimes offer an alternative source of work for property lawyers is too specialised for the firm to get into quickly enough to make it worth its while in the circumstances.

Instead Kitson Hutchings has opted for a sectoral approach, looking at specific client types such as nursing homes, recruitment businesses and the retail and leisure sectors, where they can offer tailored services across the board to these clients.

Meanwhile for larger firms like Foot Anstey and Ashfords, the downturn could present further opportunities in project and PFI work. 'We are expanding rapidly in this area and have just taken on two partners from Norton Rose,' says Ian Daniells. 'More and more PFI work is done outside London because of overheads. The problem is to convince clients to come to a provincial firm, but as value for money is moving higher up the agenda we have the edge over City firms.'

Most of all however, firms are tightening their belts, making sure they get paid for the work done and are operating as efficiently as possible.

Lean legal machine

In a world where liquidities have all but frozen cash flow has become the first priority for law firms.

'Cash has to be the top priority,' according to Daniells. 'You need it to survive '“ the only real crisis, if you are going to have one, is if you haven't got the money to pay the staff.'

As soon as Daniells saw the way things were going staff were moved from other departments to credit control to help get the money in promptly. 'We are now much stricter on chasing unpaid bills and our debt is under control,' continues Daniells. 'A lot of firms must have difficulties, even if they are not admitting it '“ those that ran on overdrafts before the credit crunch will now be encountering serious problems.'

Over at Foot Anstey, Jane Lister echoes the warnings: 'You must bill work in progress and collect cash, this must be a major focus.'

Michelmores' Andrew Lovell sees it as part of the broader efficiency and client relation picture. 'Each new matter must be set up properly, detailing cost estimates and billing arrangement and it must be explained to clients clearly from the start,' he says. 'Time must be recorded effectively, work must be converted into bills quickly and these bills must get paid quickly too. That process has to be scrupulously followed: there must be no delays in doing the work, getting the response from the other side, getting the bills out and paid.'

When not directly related to cash, efficiencies come next on the recession-beating action list. 'Efficiencies within are essential,' says Everys' Griffin. 'It is no good having the best IT system if it is not used properly.'

Getting the work done by the right person is also a concern shared by Andrew Lovell. 'You must ensure that the work is split down into specific areas so each piece of work is done by the right person at the right cost.'

Daniells adds that partners in particular should be more confident about the division of responsibilities. 'There is a tendency in cash-strapped times for partners to do all the work themselves, leaving the associates with little to do. They shouldn't. This is precisely the time when partners must get out and about, bring in the business and give the work to the associates.'

The Blitz spirit

So the credit crunch has not dampened lawyers' spirits. Some, it feels, almost relish the challenge it poses them to get their houses in order so that their firms emerge at the other end stronger and better.

These firms will arguably be in the best position to take on the next battle coming their way. Experts predict that even if the recession is to last a decade the first signs of recovery should start appearing by the end of 2009. By then we will be entering the new era of the Legal Services Act and firms will have to be ready to tackle the commoditisation of legal services. 'Getting the volume right is difficult,' says Foot Anstey's Jane Lister.

'I wonder how high street firms will compete in a few years.'

But as Lister herself confesses, it is not just high street firms that will be affected, the way all firms are structured and do business will have to change. Surviving the credit crunch will help, but how many will have time to gather their breath again before the liberalisation of the market hits them?