Growth, profits and recessions
Has the performance of the legal services sector in the United Kingdom lagged the economy generally? Data recently published by ‘The Lawyer’ suggests that compared to many other industries, the business legal sector is actually in pretty good shape.
Between 2007 (the year of the peak before the global financial crisis) and 2017, the revenues of the top 200 firms in the UK rose by 73%, to GBP23.5 billion (roughly USD31 billion.) The number of lawyers working in those firms (partners + associates) rose 47%, to 63,548. On the face of it and given that rates have been under severe pressure, that shows not only good growth but also that firms have become far more efficient. Over the same period though, and despite active management of equity vs non-equity partner ranks, inflation of 26.6% has far exceeded average growth in profits per equity partner (PEP) at 15%, across those firms. So, increased efficiency has not generally been adequate to translate into enhanced profitability. There are exceptions. Allen & Overy, for instance, increased PEP by 47% over the period, to £1.5 million.
Nobody likes to think about bear markets and recessions. We are not predicting that another economic downturn on the scale of the global economic crisis is imminent. However, there are enough warning signals for those who would see, to know that a serious recession is possible in the short to medium. If we look back over the historical frequency with which major recessions have occurred since the Second World War, it is perfectly reasonable to plan on the basis that we closer to the next one, than to the last one. At the core of such contingency plans are scenarios which, unlike forecasts, are interpretations of what plausible futures might emerge, rather than predictions about what will arise.
The time to buy is when there’s blood in the streets, even when it’s your own.
Baron Nathan Rothschild (1777-1836)
Asking “what if?” questions, in other words, with as much focus on opportunities as on threats. Troubled times offer opportunities to those with resources and the agility to capitalise on them. As Nathan Rothschild (18th-century British nobleman member of the Rothschild banking family) is credited with saying: “the time to buy is when there’s blood in the streets, even when it’s your own.” While the figures in ‘The Lawyer’ are impressive, we all recall the deep pain suffered by firms in 2009/2010, as cash-flows constricted, clients stopped instructing them and access to credit dried up. The same happened, admittedly to a far lesser degree, with the dotcom crash of 2002. Like the global financial crisis, the dotcom crash also saw the end of a number of prominent law firms. Some collapsed spectacularly – others escaped that demise by merging.
What contingency plans do you have in place for the next recession? Are there things that you can do now, that would make your firm more resilient and agile when it comes?