Whiteboard

The legal profession in the UK has been feeling the pinch more than most sectors lately. News comes, courtesy of The Lawyer, using the analysis of costs lawyer Jim Diamond (21 September), that ‘magic circle’ partner rates are set to fall by a third in an attempt to compete in the mid-market.

Mind you, this does not put them into the Poundland class – you are still going to have to shell out some £450 or so for an hour of their time. 

And price sensitivity remains core to the sector. If insolvency practitioners are getting £900 per hour (believed to be the case), then a decent recovery should push partner fees back up to their ‘normal’ £680 or so quite quickly – or so you might think.

The obvious cause for this fall is recession but a contributing factor, emerging long before Lehman Brothers collapsed, may be increased corporate resistance to the arrogant professional demand that, because every minute is carefully registered, the cost of minutes, or the number of those minutes, are not matters for negotiation or discussion until the bill has been presented.

Another factor in high prices may cause public policy concerns eventually. Formal cartels to fix prices are illegal but informal structures have emerged where an in-group effectively dictates prices because no-one breaks ranks in setting charges. There appears to be an ‘understanding’ (which looks to the outsider as something damn close to collusion).

The constant inflation of non-executive remuneration and higher executive earnings before the ‘crunch’ undoubtedly had a great deal to do with recruitment firms, on percentages, engaging in such ‘understandings’.

Consciously or not, Board Directors negotiated exceptionally generous packages with little risk that would set standards from which they would benefit themselves, creating an inflation in remuneration that was always justified as ‘competitive’.

Similarly, the ‘blind eye’ aspects of the Parliamentary expenses scandal eventually comes down to an ‘understanding’ between officials and MPs about working the system on the implicit basis that an open debate might not be politically helpful.

Under vague guidelines, some played it straight but others were able to drive up their benefits because no-one within the political community thought that it was in their interest to make a fuss.

Most of the professional services world is now under sufficient competitive cosh that such group-think abuses do not generally take place – although we have our doubts about some public sector work where the Government seems incapable of using its monopoly position to full effect and has a very curious ‘understanding’ of value.

But there is an argument that the way that partner rates in the lergal profession rise and fall in tandem should be regarded as deeply suspicious, perhaps centred on ‘understandings’ about how the profession relates to its customers rather than on pure market considerations that might otherwise drive prices down.

Historically, this ‘understanding’ has been helped by the legal and compliance side of large businesses which have often not been as mindful of costs as other departments. A Board of Directors has often just accepted high fees as a necessary condition of doing business in the big league.

A Board may scrutinise sales figures, pricing and even the cost of the company yacht, but it will often just grumble and move on when legal fees come up. The invoice is presented – “See what you can do, Geoff. Next item …”

But high fees, especially for litigation. have often discouraged creative use of the law, including best use of its potential synergies with public affairs and negotiation, to solve commercial problems.

The prevailing culture now contains an element of moral hazard where disputants might choose to settle against the justice of a case rather than risk the full costs of a loss if fees are awarded on a technical or point-of-law failure to win.

On the other hand, although good lawyers do not do this, the temptation to ramp up a case, avoid negotiation and then sell the action on the basis that the other side will pay must be a matter for concern. Law as a poker game is precisely the type of risk that sound business should not be about!

With costs of appeals taken into account and the high cost of management time involved in litigation, even the best funded corporate player (as opposed to your average litigating oligarch) must now be tempted to find a commercial compromise even if the settlement weakens his position in other ways.

Perhaps this situation is forcing a re-think of how corporations use the law. This, with the multiplicity of competing law firms and lawyers that have emerged during the boom, is forcing Boards to turn to their executives and demand, as part of the job description, more value for money and a roster of firms that compete against each other on price, as well as on skills, for the company’s business.

Under this pressure, big law firms are more than a little trapped with huge fixed staff costs and big financial expectations from big egos in a very much more sophisticated and critical market.

To top this, many ambitious firms of all types have been hurt by their decision, at the peak of the last economic cycle, to go global – often to that sink-pit of expat hopes, Dubai – while the deal flow, though not as catastrophically low as first feared, is still weak.

The next economic cycle might be good for London but, in global terms, its relative advantages are likely to be much diminished in favour of other centres.

If ‘big men’ from Africa and South America decide not to come to London but to go back to a revived Wall Street or Dubai, to Shanghai or to Mumbai, to Berlin or even Paris or Zurich, then the sensitivity to demand, which has been helped by the phenomenon of the oligarch, could set a ceiling on average prices.

This is why the ‘magic circle’, with their global growth ambitions in abeyance for a few years, are now on a ‘rape and pillage’ mission directed at Middle England.

The pressure on major provincial law firms for the next year or two means that senior partners should be busy meeting and greeting their key clients to sell them the benefits of continuity.

If I was such a senior partner, I might suggest to clients that ‘competitive’ rates (still higher, by the way) might only be around for a while and that, in the meantime, their firm’s accumulated knowledge of the client might be lost for a marginal temporary benefit in unnecessary additional expertise.

Other pressures may emerge: a questioning of differentials between partners and ‘grunts’ on the advisory team - and for fixed fees.

Clients may want more newly-qualified and associate support in implentation and a more focused partnership engagement. Fixed fees might become a tool designed to ensure that a law firm improves management of services, only uses persons in appropriate roles and restricts high partner payments to quality advice and quality control of the delivery of actual services.

Lawyers are often notoriously poor managers resenting  managerial leadership, confusing the clocking-on/clocking-off mentality of a time management system for effectiveness in the use of that time.

The managerial revolution that took place in audit to create the lean mean fighting machines of the Big Four is still only half-baked across the legal profession, if only because ever-rising revenues have given no incentive to challenge the egoistic culture of the top rain-making professionals.

The senior management is in a bind. The motivation of rainmakers is not something you fool around with. On the other hand, law firms are not deal-based investment banks. The culture of Goldman Sachs is not necessarily an appropriate professional services culture even for the ‘magic circle’.

A rainmaker culture is fine at the top but it may be degrading the offer where partners are given equal leeway and freedom regardless of delivery and when the purpose is to sustain corporate relationships rather than chase down a few giant deals. Sufficient effective delivery and flash super-delivery are both jammed under the same partnership model.

Market conditions should see an eventual normalisation of conditions in the legal market after the weaker players inside and outside the system have been shaken out and as recovery increases demand but the ‘magic circle’ should not get too complacent.

The corporate sector has been badly hurt and a culture of scrutiny of deals and fees is not going to go away.  The public sector will not only be under some very particular scrutiny of its own but it will be tempted to force its standards on to the private sector.

And be aware that, with an election on the way, a Prime Minister who has re-discovered his old socialist roots, an Opposition Leader sensitive to accusations that he will be too kind on his ‘toff’ friends and expectations of another bonus scandal this Christmas, the pressure on the private sector’s culture of excess is merely in abeyance.