Chill winds of reality for partners

Increased lawyer movement is a sure sign that the economic downturn is biting - but no one should expect a partnership for life, writes Ronnie Fox

Business confidence is at a low ebb.

Giants of the business world have been seen to have feet of clay.

Stock markets are on a roller-coaster ride.

Inevitably, the harsh economic climate is creating a pressure-cooker environment for many law firms.

Corporate transactional work has traditionally driven the large commercial firms' profitability.

Some have built up specialised teams which rely on a steady deal flow.

If the deals do not materialise, there are hard choices to be made.

A short-term response is to keep the team in place even if that means that some lawyers are doing little or no profitable work.

But the economic pundits are now saying recovery is six to 12 months away.

So we are seeing firms of all sizes implementing redundancy programmes.

Corporate finance lawyers in particular are being asked to accept lower remuneration or to agree departure packages in an effort to maintain a reasonable level of profitability.

The malaise is not confined to commercial firms.

There are solicitors who have adapted their business models to collective conditional fee agreements.

Insurance companies - some of which also have financial problems - are challenging such agreements, citing uncertainties about their enforceability.

This vicious cycle can have a disastrous effect on cash flow and profitability.

Other business models are also under attack.

Among the fastest-growing firms of solicitors in the nineties were those closely associated with large accountancy practices.

The business strategy for the major accountancy firms was to provide the widest possible range of professional services, competing head-on with independent law firms.

Following the debacle of Enron and Arthur Andersen, this model may no longer be viable.

The real or imagined effect of corporate governance rules and the Sarbanes-Oxley Act in the US has been to undermine the willingness of partners in accountancy firms to refer work to their legal offshoots.

Some partners have been told (officially or unofficially) not to refer clients to their associated legal practices; others have adopted the practice of always recommending three alternative firms, including their associate.

The legal practices connected with large accountancy firms are shrinking fast as a result.

Another phenomenon in the legal sector has been the increasing stream of transatlantic mergers.

Typically, the announcements of such mergers refer to long-term strategic considerations and the professional aspirations of the lawyers in both firms.

One can speculate as to the extent to which future mergers might in truth be the result of economic pressures in the UK and the severe shortage of leadership and management ability in the legal profession.

Mergers, transatlantic and otherwise, pose challenges.

More partners are deciding not to stay with merged firms - or having that decision made for them.

Cultural change and strategic fits are easier to achieve on paper than in practice.

No matter how much care has been taken to draft merger agreements and partnership deeds, it is remarkable how many of the firms we are advising find that their provisions on partnership changes and remuneration adjustments do not say quite what the managing partner would wish.

The combination of these factors has resulted in an unprecedented rate of partner movement.

At one time such movements created much prurient interest in the professional press.

Today law firms have learnt to manage them without attracting enormous amounts of publicity.

Termination arrangements usually include a confidentiality clause and an agreed statement for issue to the legal press.

Partner movement is a good barometer for measuring the pressures that all professional firms are facing.

How the professions measure up to these challenges is an open question, but we are unlikely to see a return to the days of partnership for life.

Ronnie Fox is the senior partner of City law firm Fox Williams and the president of the Association of Partnership Practitioners