Is the recession over? From a UK perspective I guess the answer is “just about!”

So as we are now on a slow road to recovery when will the good times return? Well I’m going to put my neck out and say never!

At least not in a return to what seemed to be the halcyon days between 2006 and 2008. My thoughts are these will be seen as the pinnacle of law firm revenue and profits per partner and I honestly think they’re gone for good.

Agree/Disagree? Let’s take a look at the graphs for big law UK (the figures are an average pulled from the top 20, to give a better picture of BigLaw firms generally). *click the images to get a larger size*

The growth is starting to slow, but is probably dipping in real terms. Due to the top 20’s truly global nature, their growth will probably look as if it is continuing for a few years as they receive greater revenue due to their size increases and global markets.

A better picture of the plateau being passed is to look at the picture for the mid sized firms. 2008 being the peak, the revenues are starting to fall.

But this is just a small dip isn’t it? Once we’re out of the recession things will move upwards again. Hmmm, if you look at the Profits per partner, the picture is much worse. And after all isn’t profit the real indication of the “good times”.

But again isn’t this just a dip until the markets pick up again?

I don’t think so. There are a number of factors why I think this drop off post 2008 isn’t just a dip which law firms will bounce back from.

• The move from the old style bill by the hour and for those that continue to bill by the hour, the pressure to keep costs low. As one IT Director put it “Yes we’re looking at alternatives to billable hours… but only because we have to”. I can’t see us not having to, clients will continue to make us!
• The UK (and US) markets are pretty saturated. There isn’t much room for growth. The introduction of the Legal Services Act 2007 as well as further commoditisation of legal work will put more pressure on fees.
• The costs were slashed across the board in most firms through 2008-2009. And still profits were down! All those expenses that have been deferred (and I bet there is a fair bit) will start eating into future years revenues.

And there are many challenges of the recession and economic downturn yet to come.

• Although many firms this recession have been sensible and avoided over enthusiastic job cutting, there have been plenty of pay freezes. This could be a drain on costs in the coming years as staff want that raise! The problem will happen first in the support depts., the staff there have a market for their skills outside legal. So the market could dictate a rise in salaries even if legal would ideally like to keep wages low.

As the graphs above show it’s having less of an affect on BigLaw at the moment, but as competition grows fierce in the mid sized firms, the BigLaw could see their home markets coming under more and more pressure. It’s only so long before BigLaw can rely on the non-UK revenues to keep the growth going, eventually you run out of places to grow!

So what’s my point? That Legal is a basket case and lawyers will have to get used to smaller pay packets?

No, I’m not saying is that Legal is a basket case, just that the peak has been reached. From here on in the competition will start to hot up, but as with any mature business this is good news for the client and good news for innovation. There will be winners and losers, but we’re not going to see all the top firms continue to grow. Overall the average will plateau, but within there will be firms that really increase revenue and profits and there will be those that really drop!

We’re in for a really interesting time in legal, seeing how firms change, how they innovate and from a personal point of view whether they really embrace IT and start using it as an enabler of change rather than a utility.

After a lot of talk of this happening and a few false starts, I think we’re now in for interesting times!