Law firms in for a tough end to 2009
Jun 2 2009 by Tom Scotney, Birmingham Post
Law firms are in for a rocky ride in the second half of 2009, with statistics predicting that spend on corporate legal services is set to drop by nearly a fifth.
The figures from global legal sector researcher Acritas said legal spending is due to drop by a further 17 per cent before the end of the year, a much faster rate than the overall Treasury’s GDP estimate of 3.5 per cent.
Acritas’s monthly tracker survey, in February predicted a modest drop in spend amongst legal buyers of six per cent in the year ahead. In March this prediction fell to 12 per cent but the April figure, the most recent to be published, saw it fall fell further again to 17 per cent, bringing the average for the three months combined to a drop of 12 per cent in the year ahead.
The firm said the predictions are even gloomier among larger organisations as they predict making larger cuts. The hardest-hit practice areas are corporate finance and property legal services and the most buoyant area is litigation followed by employment and regulation.
Law firms in Birmingham have been particularly badly hit by the contraction in the property sector, as the city could previously rely on a high turnover of lucrative commercial property work as the city transformed.
According to the survey, international spending was holding up well, with a five per cent average increase in legal spend levels internationally anticipated by internationally active respondents. Top-level firms who successfully pursued international strategies to service their UK clients, such as Freshfields and Linklaters, will benefit from continuing income in relation to overseas advice.
More than a quarter of respondents said they anticipated increasing spending in the next 12 months – which could be an opportunity for firms alert to market trends and close to clients.
Average hourly rates paid to partners in law firms have held up at 2008 levels, with the average hourly rate paid to partner up at £339 in 2009, a three per cent increase on the 2008 figure of £328.
Acritas said change was likely, with more than half the legal buyers (60 per cent) anticipating changing their legal strategy, which includes greater control of their external spend. A quarter of legal buyers were looking for discounts on rates and the same proportion was looking to move to fixed fees, rather than the traditional pricing model of hourly rates.
Ninety per cent of buyers said there was room for improvement in efficiency at law firms, with only ten per cent believing the market operates ‘highly efficiently’.
Despite the drive for lower costs, legal buyers were not supportive of firms outsourcing, with 67 per cent feeling negative about law firms outsourcing legal processes to companies in emerging markets, such as India. Legal buyers are positive, however, about firms moving some resources out of costly City of London locations as long as quality levels are maintained.
Lisa Hart, the chief executive of Acritas, said: “Whilst many headlines have reported law firm redundancies over the past few months, only now are we seeing evidence of how deeply the economic crisis is going to shape legal spend. We are seeing even more negative results in our US research. Firms are managing to maintain high hourly rate levels but this is not sustainable in most areas as supply starts to heavily outstrip demand. They need to look to better meet their client’s needs and support them during this difficult time to ensure they are not one of the firms cut as large corporate trim their legal panels. Firms that make aggressive bids to provide more cost-effective services will win market share.”
