Paul Lippe takes a look at how London – home to four of the six biggest law firms in the world)has coped with the downturn and looks at the key factors likely to have an impact on demand for legal services.

As travelers have noted since time immemorial, the best way to enrich your perspective on your own culture is to step outside it and visit someone else’s. I spent last week in London (home of four of the six biggest law firms in the world), talking to clients and law firms. I’ll offer some observations and predictions on the legal market worldwide based on what’s happening in the U.K.

Given the credit crunch, and the various interventions by governments, central banks, shareholders and investors, six factors are likely to have a significant negative effect on demand for legal services:

1. There will be downward pressure on executive compensation. Since law firm compensation is highly correlated with the pay of the most highly paid folks in clients, this will have a dampening effect.

2. There will be dramatically less deal origination in most categories of synthetic or derivative securities, which are highly complex and generate commensurate legal fees.

3. There will be dramatically fewer mergers and acquisitions without leverage to support private equity returns.

4. The overall recession will dampen economic activity, and, therefore, client demand across sectors.

5. Many of the largest financial institutions are likely to face 20 to 25 percent headcount and budget cuts across the board. As such, it’s highly unlikely that they’ll hold either legal budgets or law firm spending sacrosanct.

6. There will be less overall tolerance of risk, and, therefore, greater harmonization/standardization of terms and practices.

While there will be countervailing factors such as the growth of hedge funds, restructuring, litigation and bankruptcy, the net effect of the above is likely to be the greatest year-to-year decline in law firm revenues that anyone practicing today has experienced in their lifetime. Whatever the most extreme forecast you’ve seen about the decline from 2008 to 2009, you should double it.

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