UK law firms ‘need more restructuring’

By Caroline Binham | Legal Correspondent

UK law firms will have to cut another 5 per cent of their headcount in order to return to the profitability they became used to before the downturn.

The UK legal market is over-lawyered by about 3,000 fee-earners whom firms will have to fire as they cope with the twin demands of a gloomy macroeconomic environment and a profession undergoing its biggest structural changes in decades, according to new research undertaken by the Royal Bank of Scotland.
“New business models and organisational structures, resourced differently than the traditional law firm, will be required to improve chargeable hours to levels that can be expected to deliver materially improved profitability over time,” said James Tsolakis, RBS’s head of legal services.

“Alternatively additional restructuring will be required to further eliminate fee-earner capacity.”

The findings will be controversial for an industry still reeling from cuts to headcount made during the financial crisis, which, according to RBS’s research, amounted to a reduction of 15 per cent of lawyers and support staff across the market.

Even the so-called “magic circle” – an elite cadre of the most profitable London-headquartered firms with large international footprints – had to fire hundreds of lawyers as the crisis dried up lucrative mergers and acquisitions work and banking deals that had become firms’ mainstays.

While those redundancy programmes were headline-grabbing, firms are continuing with “very private and discreet” restructuring, RBS said.

It expects the legal market on average will report revenue increases of about 6 per cent this fiscal year. That compares with a forecast 5 per cent average growth for the 2012-13 financial year, according to the report.

While that may seem decent for other industries, annual revenue growth of about 30 per cent was not unusual before the crisis.

The crisis has also led to general counsel within companies becoming more demanding when they buy legal services in order to cut costs. They are trimming their panels of external legal advisers and shunning the billable hour that has traditionally translated into a firm’s profits.

The Legal Services Act, which came into force in October, and which makes England and Wales one of the most liberalised legal markets in the world, has also acted as a catalyst for new types of companies that deliver legal services.

Firms are moving high-volume work to other cities such as Belfast, while new forms of legal process outsourcing, or LPO – some of which firms are investing in – are emerging.