The lessons of the GFC when law firm headcounts went down have seen Big Law firms in London resist the temptation to cut staff numbers as transactions drop in number and law firm revenues look more shakey.
The intense heat of the London legal market and the pressure of the so-called ‘Cravath Scale’ involving dollar-for-dollar matching of pay checks, has seen all manner of attractions introduced for lawyers to switch firms, ranging from yoga lessons to beehives (yes, you read correctly).
So far this year dealmaking is down by three-quarters on the start of 2022. Financing, when it returns, will be more costly. There is some hopeful talk about “green shoots” or old ideas being dusted off as the economic air clears, the Financial Times reported.
The major cutbacks announced by Goldman Sachs with a dramatic drop in profits, followed by an equally dramatic cut in staff numbers, which sent law firms into the dark zone of concern.
According to the Thomson Reuters 2022 law firm survey staff turnover at law firms peaked in 2021 with the London pay wars, lead by the major US law firms in The City.
“The significant growth in lawyer headcount during 2021 offset the increase in demand to moderate any growth in productivity,” the Reuters report showed.
But the report also indicated that direct and overhead costs for law firms increased dramatically during 2021.
“The steep acceleration in overhead expenses isn’t as important as that of direct expenses, at least at the moment. Although recording strong growth against 2020’s low overhead figures, firms have thus far held the growth of their indirect expenses to roughly pre-pandemic levels.”
With top salaries for newly qualified lawyers reaching £170,000, which can be as much as £60,000 more than the roster of major UK law firms.
The downturn in work has been aggravated by the high costs of the pay wars, which have seen the huge increases. Big Law firms like Allen & Overy and Clifford Chance have pointed out the same factor in their own reports.
Also, the lockstep system is becoming less prevalent in the larger law firms. The lateral movements of partners and other senior lawyers has been an ongoing issue for the firms, more so as the transactions market enters a period of stagnation.
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