Storm clouds started gathering over the legal sector in 2007 when the market was in fact reaching its peak and it became clear at that time that troubled times were soon to impact globally on the legal sector, affecting almost every aspect of it. One of the first sectors to be hit, and one of the first to react, was the banking sector which up until the final half of 2007 had been at its most buoyant with investment banks, hedge funds and other financial institutions hiring at previously unprecedented levels. Such institutions typically work with a select number of recruiters who form part of what is known in the industry as a PSL (preferred suppliers list). Major banks would typically have 5 or so recruitment companies on their PSL on whom they rely to fill vacancies. Banks typically work around annual recruitment budgets which allow headcount for various areas within banks. As it became clear that the economy was imminently approaching a major correction, the banks were one of the first sectors to freeze recruitment budgets across the board including legal. As a member of a number of these PSL's, we saw in early 2008 the vast majority of clients freezing their recruitment budgets which by mid 2008 meant virtually no banks or major financial institutions were hiring at all. This remained the case up until early 2010 when the banks (who had borne the brunt of impact of the recession) began to recover with high level of activity in areas such as fixed income and other areas related to debt.
At this time most banks were experiencing an increase in activity across most lines of business and there was a quick upturn in the number of vacancies released in early 2010 as budgets for recruitment returned and line managers were keen to get additional headcount to relieve the burden on lawyers who were having in some cases to handle the work of individuals who had left in the recession and were not replaced. Most banks were back into the swing of recruitment and it felt like a return to the good old days without quite the same frenzied demand that existed pre-recession.
The market has slowed again as headcount issues have been resolved and an element of caution seems to have returned from the third quarter of 2010 as new problems in the global economy emerge including concerns regarding a double-dip recession, sovereign debt, further asset writedowns for banks and a troubled public sector. Most of the vacancies that arose in this revival period of early 2010 were filled by candidates who had either bided their time in the major law firms to wait for an opportunity to make their dream move into an investment bank and those within investment banks seeking to move laterally to another bank.
Individuals affected by redundancy in 2008/2009 had mixed success depending on their area of expertise, but the preference for banks was to recruit individuals who had remained in employment throughout and who could demonstrate an ability to adapt to the changed world of finance law. Lawyers skilled in specialist areas such as RMBS (residential mortgage backed securities) have struggled to re-enter the market as that market has effectively collapsed whilst those who had developed a broader skillset to include for example broader structured finance experience including securitisation, restructuring and more general finance experience benefited from new streams of work involving, for example, the restructuring of SPVs (special purpose vehicles) which form a part of most securitised deals. This means lawyers must maintain both a current skillset and market knowledge as the banking sector develops new areas of financing which will replace the highly leveraged and risky deals that predominated in the boom years.
These new areas, which are more like the more traditional 'vanilla' areas of banking from the past include syndicated lending, regulatory, funds and mezzanine financing. The recession also led to new boutique banking entities setting up to focus on the new growth areas with teams of individuals who had left their big institutional clients joining together and creating the new businesses of the future. Through understanding the business side of their new specialist areas these boutiques are forming a new sector within financial services, which is akin to the emergence in the last decade of specialist boutique law firms who set up specialist practices to offer an alternative to the specialist departments within the mid-to-larger law firms with more competitive pricing structures.
Following on from the reaction of the banks and hedge funds within the financial services sector, law firms seemed to react at a different pace depending on the firm and the sector. The large international firms, including the magic circle firms, reacted quickly to the emergence of recessionary times in 2007 by introducing redundancy programmes that affected those with the unfortunate skillsets that were most affected by the recession - notably real estate and some areas of finance including RMBS - hitting lawyers with a narrow skillset who were dependent on work being generated by major clients of the firm who were themselves badly affected by the recession. At its worst, the situation led to some companies collapsing; but many radically realigned their business models. Many of these lawyers have left the profession or taken lengthy sabatticals or time out to learn new skills both legal and non-legal related. Those who were able to best adapt to the changed landscape fared best.
An example is a mid-senior level solicitor with experience of property law both non-contentious and latterly contentious. There were few jobs available for the individual on the non-contentious conveyancing side but property litigation was one area that outperformed during the recession for a number of reasons. Firstly the level of disputes arising out of the Landord & Tenant 1954 Act increased as pressure hit both landlords and tenants who struggled to meet their obligations on rent, dilapidations and service charges. Enfranchisement has also been a particularly buoyant area as the best time for leasehold owners to seek to enfranchise is during a recession where property values are at a low. The candidate was able to secure offers on the basis of his contentious experience which he commenced developing before the recession hit.
Relevant training along with building relationships and contacts with trade associations and other entities meant the individual was well placed to capitalise upon a growth area and, by making sure he was in the right place at the right time meant he was able to secure a more attractive role in the recession than he had pre-recession. Other areas which benefited from the recession include specialist sector litigation including banking litigation, employment litigation, fraud, white collar crime and regulatory disputes. Banking litigation has been a growth area driven by the increased levels of litigation affecting the investment banks which have faced significant actions from investors who had bought highly leveraged structured products resulting in significant losses. The larger law firms are typically be affected by conflicts as most act for arrangers on such deals. A number of mid-to-smaller law firms have seized the opportunity to hire these individuals from the larger firms and set up buy-side litigation services for clients who are conflicted from using the services offered by larger firms. These firms have actually outperformed in the recession with increasing PEP numbers for their partnerships over the last 4 years. Those individuals who anticipated the market correctly and positioned themselves through market knowledge, maintaining technical skillset involving ongoing training and learning on fast changing areas of law have seen the benefits. As we enter a period of increased optimism there is much more recruitment activity in the marketplace than in the last two to three years and the demand for solicitors with experience in areas including litigation/international arbitration, regulatory, commercial (including outsourcing), top end cross border M&A and broad banking experience have returned. The market is shifting once again in favour of mid-level candidates with quality skillset. We recently obtained 3 offers within 3 weeks for an assistant solicitor who had been made redundant in the recession in 2009 and who took a year out to travel. The individual has an immaculate C.V. with outstanding experience and academic credentials and the fact she had been made redundant and taken a year out presented no problem to her re-entering mainstream private practice. She did however keep herself abreast of her specialist area and the changes that had taken place during her absence by reading the relevant specialist law journals and also though training. It helped the candidate considerably in her interviews to be able to show that she had kept up to date with all the developments in her sector and in the law. Demonstrable current market knowledge through training and reading is a prerequisite to re-entering the legal market after a period of non-practice.
The Bar has faced its own pressures differing in some ways to other parts of the profession. The criminal bar is immune from the recession in terms of the volume of work in that sector but it has been severely impacted by changes in funding that arose from the Carter Reforms. Blood & guts criminal barristers are increasingly having to develop their skillset into more lucrative areas such as white collar crime and fraud. This has caused both chambers and members who specialise in crime to radically rethink their strategies. Sets increasingly rely upon senior marketing and business development professionals such as Chief Executive Officers, typically recruited from other professional service providers such as law firms and occasionally accountancy and consulting firms to take control of strategy and steer chambers through challenging times. There is a big emphasis therefore in ensuring that members are kept abreast of market trends and also to ensure they have the relevant skillset to handle these new areas, which can be gained through ongoing training and development. In stark contrast to the criminal bar, the commercial bar has gone from strength to strength with the leading sets recording year on year growth in their turnover as litigation and arbitration has as expected increased in recent recessionary times. Demand for good juniors, senior juniors and silks in the leading sets remains high. It is rare to find a top-performing chambers which cannot boast a significant number of silks and members who are either accredited mediators or arbitrators and fully-trained in alternative dispute resolution techniques. Similarly, multi-jurisdictional capability has marked out those individuals able to handle complex cross-border litigation.
As we enter the next stage of the economic cycle (many believe the bottom of the current cycle has been reached) there remain many challenges ahead - both positive and negative - the major one being the forthcoming Legal Services Reform Act (LSR), which takes effect in October 2011. These reforms will impact upon the business of providing law in several ways.
Firstly there is the potential advent of the law firm Plc business model. At a recent legal forum that included a number of high profile names from the legal and finance sector, it was mooted by a leading City corporate financier who has been analysing the legal sector for some time, that within the first few months following October 2011 there will be 3 to 4 flotations of law firms on the stock exchange. These firms are likely to come from the mid-tier sector which is the sector within the top 100 law firms that faces the greatest challenges. Others within this sector will seek financing through various means including private equity and venture capital. Increased mergers are likely with mid-sized firms having to adapt their business models in order to survive (in some cases) and in others to benefit from these imminent changes.
It is unlikely that the magic circle and other leading law firms will need to change their structures or their financing models so dramatically because they dominate big ticket deal work. Nor can I imagine that partners from such firms would relish the idea of being influenced in what they do by private equity houses. Such partnerships are highly profitable and to date remain the only business model where equity partners can enjoy the benefits of the level of drawing they have which are unlikely in a private equity-backed model, where compensation could be a combination of base salary, equity and bonus more similar to that of the investment banks where base salaries for the most senior members is typically lower than equity drawings of equity partners in law firms. If anything a magic circle firm might seek mezzanine financing if necessary.
The second area likely to see change as a result of LSR is that of the bulk providers of legal services such as high volume personal injury and other private client work. Firms operating in these areas will have the option of securing financing, typically through private equity or venture capital to expand their business through the additional resources they will have available to them. The additional funding will increase the firms' budgets for opening further offices, hiring additional staff and increasing their resources including training and development.
The third and perhaps most radical of the likely changes will involve the formation of multi-disciplinary partnerships, likely to initially occur within smaller and boutique law firms. I am aware of a number of smaller firms who have already started to build their business models in readiness. An example is a sole practitioner who was a corporate partner at a larger firm who set up by himself due to the recession. His model is to offer a one stop shop to SMEs, having legal, accountancy, compliance & risk and regulatory under the same umbrella.
It has been a rollercoaster ride in the last two to three years and the legal sector offers both opportunities and threats to those whose livelihood depends on it. The best-prepared lawyers, firms and chambers will thrive. Ongoing training and development of the individuals within these organisations is essential to ensure that they have the relevant skillset, market knowledge, commercial acumen and ability to adapt and change will provide the best preparation to meet the challenges that lie ahead. Providers of training also need to adapt to the prevailing market conditions. Setting training programmes in stone too far in advance can mean that courses can become obsolete in a fast-changing market. Trainers need to be responsive and flexible in changing market conditions just as much as lawyers. With pressures on internal budgets of firms, training and ongoing education providers need to be competitive on pricing their courses, and on increasing their offering of flexible learning methods for those individuals who wish to attend courses but simply cannot obtain authorisation for travel budget and time out of the office. If the training and ongoing education market pitches its products and pricing correctly, the appetite for continuing professional development amongst lawyers who are working in an increasingly competitive world should not diminish.
LPA Legal Recruitment was quoted in CPD for Lawyers (November 2010)