Editors' Blog

Results 2008: fighting fit ahead of battle

Posted 19/05/2008 by Alex Novarese

So when is the crunch going to show up in law firms’ financial performance?

Conventional wisdom has it that there’s a significant lag between the economic cycle turning and a worsening of law firms’ financials. The theory is that law firms are at the back of the pipeline, get hit last and are last to see the recovery when the deals dry up. But no two cycles are the same and the results seen so far are showing only sporadic evidence of eight months of prolonged credit turmoil and tumbling business confidence.

So while we’re no longer in the kind of market in which anyone can make money and firms like Bevan Brittan, Halliwells and Beachcroft have announced redundancy programmes, there are more firms apparently powering through the difficult market.

Among them are Norton Rose, putting in its best numbers for a very long time, Ashurst, whose practice could hardly be more exposed to the market, and Herbert Smith, which saw turnover and profits up by more than 20%.

The results are interesting on a couple of levels, not least because some firms’ revenue growth appears to have accelerated since their half-year estimates, which seems extraordinary given the busy first quarter and state of the markets since the summer. Quite probably the crunch has yet to fully assert itself on lawyers but the results underline the continuing resilience of the law firm model.

It didn’t pan out like this in the last vaguely-comparable financial year of 2001-02. This was the year in which the dotcom crash began to seriously register, with the UK top 50 as a whole averaging 8.6% revenue growth while average profits fell slightly. This average masked heavier falls in profitability at larger firms and did precede a worse financial year in 2002-03. But on current showing, 2008 will be well ahead of 2002 in financial terms.

That’s a positive sign, which comes as there are indications that the worst of the shutdown in inter-bank credit markets is now passing. There will be plenty of consumer and housing gloom to come as institutional strife feeds through to the high street, though the impact of that on corporate law firms, while not inconsiderable, is somewhat limited.

It should also be remembered that this shift in the cycle is unusual. Turning markets are not typically heralded by a violent market shock. Usually, the cycle turn like a super-tanker: very slowly and initially scarcely-noticed. This time it turned on a dime and amid blazing publicity, suggesting its effects will be felt sooner rather than later.

The difference? The most striking contrast from 2002 is that the majority of UK law firms are in much better shape now. Back then their cost-bases were a mess and many of the top 20 were saddled with loss-making foreign offices (one major City firm was reputed to be losing money on no less than 20 foreign outposts).

Now, having learned their lessons, they are in better condition domestically but especially in their foreign offices, a factor that has underpinned the genuine revival of that much-criticised City brand, Norton Rose. I suspect this factor, far more than decent exposure to still-busy emerging markets, is cushioning top law firms from 2008’s turbulent business environment.

That certainly doesn’t make the profession immune from market conditions and 2008-09 will likely be tougher - but the intense competition of the UK legal market does appear to have at least got law firms fighting fit ahead of the coming battle.

alex.novarese@legalweek.com