London’s legal market: another Roaring Twenties?

London’s legal market: another Roaring Twenties?

For law firms everywhere, the past twelve months have been challenging. Draconian measures taken by governments to mitigate the global impact of Covid-19 have severely dented multiple economies, particularly in Europe and the Americas. This has created huge difficulties for many of their clients. The damage was not uniform: as online retail flourished, hospitality and tourism floundered. But as vaccines continue to be rolled out at scale, an end is hopefully in sight, which will deliver a strong rebound in GDP growth.

So what will a post-Covid world look like for legal London? In purely business terms, most big law firms have been largely unaffected by the pandemic. No lawyer wants to proclaim it too loudly but the legal sector has had a reasonably good year, commercially speaking. Instructions held up remarkably well in the face of a very severe downturn, far better than law firms’ initial modelling had predicted. As a result, profits are generally perceived to have been stable while some firms are set to register a healthy increase.

According to a recent report published by Thomson Reuters, average profits per equity partner in the Am Law 100 law firms increased by an extraordinary 22% last year – primarily because of widespread cost-cutting measures, such as hiring freezes and a near cessation in marketing and business development activities. Given the nature of Covid restrictions, it is no surprise that much more effort has been put into retaining existing clients rather than trying to attract new ones.

Although a more nuanced picture may ultimately emerge for UK law firms when their results are announced, modest collective growth in profitability is widely anticipated, even if revenue numbers are generally flatter and, for a minority, somewhat depressed as monthly billings remain deficient.

Noatbly, the divergence in individual performance between City firms is expected to be much wider than normal. Cash calls on partners are being discussed in at least two heavyweight firms, which are thought to have experienced double-digit revenue falls last year.

Largely eclipsed by Covid, the newly independent Brexit Britain will present a significant longer-term challenge for many business sectors. But UK law firms are not among their number: the near £40bn which they generate in annual revenues seems pretty safe, thanks to the Brexit trade deal which explicitly referenced legal services in the agreement. This confirmed market access for UK lawyers in the EU (and vice versa) under their home title practice, including advice on home country and public international law, as well as in arbitration and mediation.

For the UK’s legal services market this was very good news, especially when compared to its bigger financial services counterpart – the crown jewel of the UK economy. Continued Brexit talks with the EU are expected to last two years or more before their market access problems are resolved. Meanwhile, a steady flow of financial services staff continues to relocate in Europe with Dublin and Luxembourg remaining the most popular destinations.

On the upside – and potentially of greater long-term significance than Brexit – the use of technology to enable home working has created a seismic shift that is likely to be sustained in a post-Covid world, as remote and flexible working proliferate throughout the UK legal sector. The benchmark of up to 50% home working, set by Linklaters last September, may yet become standard practice among their City peers.

Clients have also become more accustomed to technology during the pandemic. By necessity, they are using it more. This shift signals that more people have adapted their behaviours to meet the needs of current circumstances, which in turn shapes their expectations in working with law firms.

Among the more innovative new breed of lawyers, home working has already been the norm for firms such as Keystone Law – the third UK law firm to be listed on the London Stock Exchange in 2017. Under Keystone’s business model, its 350+ lawyers use a tech platform to work flexibly, rather than working in a physical office maintained by the firm.

However, top tier City law firms invariably prefer to look outside their sector for direction on future strategy. Investment banks are a common comparator. In this context, it is worth noting the words of Goldman Sachs CEO, David Solomon.

Last month, he suggested that remote working does not suit the Goldman Sachs culture: “It’s not a new normal. It’s an aberration that we’re going to correct as soon as possible,” he told an online conference. Unlike JP Morgan boss Jamie Dimon, who has said that up to 30% of the bank’s staff could work from home permanently, Solomon wants all GS employees to return to the office.

No doubt, law firms will pursue similarly divergent paths with some taking the Linklaters or Keystone route while others choose to maintain a predominantly office-based culture. This may become a critical part of how firms differentiate themselves from each other, both in their client offering and in competing to attract the best and the brightest talent.

Of course, competition takes many forms. The growth of spin offs, boutiques, start-ups and ABS structures will continue to grow, particularly in disputes work, presenting a sustained challenge to traditional the UK’s big traditional law firms. Culture and opportunity also play a part: talented lawyers increasingly look to move to smaller or boutique firms where their voices are more easily heard. Meanwhile, the 100+ US law firms in London are an ever-growing threat as their aggregate lawyer headcount surpasses the 6000 mark.

The outlook in several practice areas will continue to be strong: refinancing, restructuring, insolvency, capital markets and employment still have plenty of mileage for the next few years of the economic cycle. Elsewhere, strategic M&A and commercial real estate seem set for a resurgence alongside general corporate work, as the government seeks to stimulate the economy through measures announced in Rishi Sunak’s recent budget.

In particular, the announcement of ten new UK freeports will interest firms with cross-border expertise and international clients. And as CNBC summarised it: ‘Post-Brexit London aims to lure tech IPOs and SPACs in challenge to New York.’ One of the Budget’s key recommendations is relaxing rules around SPACS (special purpose acquisition companies), provoking several City firms to fire on all cylinders in competing for the lucrative work that will ensue.

The outlook for dispute resolution is also robust and likely to remain so given the enduring economic fallout from the pandemic. In litigation, London’s commercial courts are already busier than ever. The same is true of arbitration. Remote hearings have worked well, eliminating wasted time and avoiding the need for travel. The courts’ impressive adaptation to new ways of working means that remote, or hybrid, hearings are here to stay.

If the outlook is reasonably bright for many law firms, storm clouds also loom for some. Those firms that have an over-dependence on certain sectors or practice areas which are likely to suffer from a long Covid malaise may find it hard to reinvent themselves. Put simply, many of their clients will refinance and restructure in order to survive – but not all of them will.

In turn, the same will apply to a few commercial law firms. Defensive mergers are inevitable and some will not survive the pressures of the next few years. But for the majority that do, the outlook over the next decade looks good. Another Roaring Twenties? Only time will tell.

Dominic Carman

Written by:

Dominic Carman, journalist, writer and legal commentator. www.dominiccarman.com

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Author: Dominic Carman