It's the economy, stupid

It's no secret the legal market is extraordinarily competitive. Coming out of university with a comfortable 2.1 and a relatively good range of experience I was feeling pretty good about myself. However, reality hit home when I realised that I was one of 68.7% of graduates achieving a 2.1 or above. So what sets a law student apart when looking to enter the market? Talking with a number of recruitment managers and trainee solicitors I was met with a single resounding response... commercial awareness. With the wealth of information available to students, law firms not only expecting us to know the firm inside and out, but to know the industry and the commercial environment the industry operates in. In this blog I hope to elucidate you of some aspects of commercial awareness.

This year I began the LLB for Graduates course. I had turned down the opportunity to go straight into work, turned down three unconditional places on the GDL and decided against doing a masters in public policy. I had moved back home after years of living away and started possibly the most exhausting year of my life with about 25hrs per week in addition to university and to top it off, I finished with the lowest average I have ever received at uni. I started to seriously doubt the course was for me, but I kept being told I was still above average for the year (I know!) and that I should be happy I had saved enough to pay off my tuition fees, gained around £8000 in scholarships and got a years work experience... but most importantly I had gained my first proper understanding of commercial awareness.

Financial Crisis
Unless you have lived under a rock for the past decade, you may have noticed the economy is facing a bit of my attempt click here, otherwise Too Big to Fail and The Ascent of Money make great summaries. However needless to say, anyone with any hope of being a commercial lawyer needs to be able to speak confidently about the crash and its consequences. The impact the consequential recession had upon law firms will no doubt be the main focus.
a squeeze of late. The 2008 financial crisis has had a profound and lasting effect on the world's economy. Studies into the causes of the financial crisis are vast. To see

Following the financial crisis, there was a dramatic decline in property transactions meaning less work for real estate lawyers. The reluctance of banks to issue credit meant less work for banking lawyers and with less credit in the system meaning less business transactions meaning less work for M&A lawyers. On the other side of the coin, bankruptcy and insolvency lawyers had much more work from business going bust and litigators were kept busy by businesses arguing over financial contracts.

As a result many firms rebalanced their practice areas, making hundreds of redundancies. More innovative firms realised they cannot simply wait for the economy to return to pre-2008 levels and have realised in a more competitive market they need to make their services more affordable. This is the vital thing which we will continue to come back to throughout this article. 

Mergers
It seems every law firm and its dog is having a merger in the past few years. A fifth of firms listed in the 2009 Student Guide have undergone a merger since then, with many more considering it. So what are the motivations behind this lengthy and often expensive procedure?

The financial crisis has not been kind to many people, including law firms. Many high street firms have gone into administration, even Cobbetts, Halliwells and Dewey & LeBoeuf (albeit for somewhat more dubious reasons). These three big casualties fell prey to the worsening market conditions which exposed their financial mismanagement. Indeed, there are still firms with financial difficulties out there struggling against rising costs and falling profits. The SRA (June 2013) even went as far as announcing it was closely monitoring the finances of 30 top-200 firms as they were at risk of failure.

Talking to a managing partner of a recently merged firm, he said the main motivation for a firm to merge is to consolidate the market. By this what he really means is that there are fewer firms wanting to do more of the work. However there are many more reasons. Some firms are looking to shore up the market position of a struggling firm. Some are genuine attempts to expand the firm's business nationally or internationally. A merger can bring in clients and offer greater economy of scale to clients through shared overheads.

Lots of international transactions are happening. A number of British firms have paired up with US, and even Australian firms. SJ Berwin became the first to merge with an Asia-Pacific firm, King & Wood Mallesons (November 2013). Elsewhere in the market CMS is hunting for a US partner, Bird & Bird is eyeing up a merger with an Australian firm Truman Hoyle and Orrick and Mayer Brown are making no secret of their ambitions for merging.

So what should a law student be aware of? Well obviously if you are applying to a firm that has had a recent merger or is looking to merge, you should understand the motivations and benefits behind it. Also if you are looking to apply to a mid-sized City firm or a small specialist English firm, it seems that eventually you will end up working for a big American firm after the inevitable merger.

Fortunately if you are subject to a merger, trainees' contracts are honoured. For those looking for a training contract with a recently merged firm, they appeal to be continuing to recruit similar numbers from their pre-merger days. Even in acquisitions of failing firms, they seem to have subsequently increased their trainee intake or started an entirely new scheme. However it is not clear that this trend will continue to hold as merged firms are likely to reduce recruitment numbers in the future to pursue economies of scale.


Public spending cuts

I remember coming back from university one summer and in addition to our usual set of bathroom reading magazines there was a small book on LASPO (Legal Aid, Sentencing and Punishment of Offenders Act 2012). It was only a year later when I started trying to build my commercial awareness that I realised the importance of this act. This act forms part of the Conservative government's plans to cut the national deficit (as distinguished from the national debt which is WAY into the trillions of pounds).

The Conservatives launched sweeping government spending cuts that heavily impacted every aspect of society, with £220m being cut from the annual £2mn legal aid budget. The now infamous Justice Secretary, Chris Grayling, began what can only be described as the single greatest systematic dismantling of everything decent about the justice system. Combined with reforms on other areas of spending, areas such as crime, housing, family, employment and personal injury face a massive squeeze. (I will not discuss the effect the cuts have had upon the criminal bar, as I want to look at this in more detail in a later blog).

The cuts have deeply affected law firms. Those who have practice in sectors heavily reliant on public funding are finding revenue streams reduced, especially those in housing, transport, education, healthcare, charities and infrastructure. The firm Bevan Brittan has seen reduced earnings of up to a fifth over the past half decade and have consequently almost halved their trainee intake. As a result there is a trend for firms like this to turn their attention to more private sector work. However it seems the larger commercial firms which practice in these areas are not affected as dramatically and the cuts will undoubtedly only affect smaller firms.

Legal Services Act 2007
The Legal Services Act 2007 has largely come into force at the time of writing. A long story short, this act regulates and liberalises the legal services market.
- For non-solicitors this means they are now allowed to become partners of law firms, forming what are called 'multidisciplinary partnerships' (MDPs).

- Lawyers are not allowed to join with other professionals to offer an 'all-in-one' service under  alternative business structures (ABS).

The idea is still pretty fresh, but it means in the future a commercial firm could handle a business' accounts as well as any contracts disputes, whilst a high-street firm can now give mortgage advice whilst also doing all the conveyancing. ABSs will also allow firms to seek external investment. Irwin Mitchell is one of the more innovative firms in this regard, having gained five ABS licenses by the end of 2012.

ABSs also mean that firms can be floated on the stock market. The Australian firm Slater & Gordon became the world's first publicly listed firm in 2007, who then entered the UK market by acquiring Russell Jones & Walker. Commentators of this market liberalisation predicted is it would result in an influx of private equity cash into the profession, however at the moment it seems neither investor nor the firms themselves are interested in that idea. This is most likely due to the financial requirements it would place on the firm and its partners.

The Legal Services Act ultimately is another addition to the neoliberal economic discourse that tenders every aspect of life up to free market capitalism. The idea behind this is to make legal services as easily accessible as any other market commodity. With the Co-operative setting up their own legal services, it is now quite literally possible write your will whilst you pick up your groceries. Co-op Legal Services was the first business to win an ABS license in the UK. The service employs over 500 staff and even recruits trainees. As of 2012 their 5 year projection was to recruit 100 trainees and have a workforce of 3000.


Trainee recruitment
As you can see above and from my previous blog posts, it is clear law firms are tightening their budget and trying to do more with less. Inevitably, this means that firms have had to reduce the number of training contracts being offered. In 2011/12 there were 4,869 registered training contracts (almost 1/4 less than 2007/08). The magic circle firms are only looking to recruit 455 graduates (down from 575 in 2008).This trend has been seen throughout the legal sector. At a recent mini-pupillage at a Birmingham chambers, they told me they have not taken on any criminal pupils for 3 years!

With a tighter budget for both law firms and clients, value for money is the aim of the game. Law firms are now reluctant to pay a junior solicitor to do menial work that they could just get a temp or an intern to do. The constant incorporation of technology into the legal profession is also making redundant much of the junior solicitors' work that can now be done through a computer program. The increasing globaliasation of law firms also making it easier to outsource the more basic work abroad. Many City firms are already doing this by outsourcing some of their work to South Africa and India.

However on a positive note, there is now little doubt that the economic outlook is improving. With this comes a greater number of training contracts! We have already seen numbers up 8% from 4,869 in 2011/12 to 5,302 in 2012/13. Most likely as a delayed reaction to the recession, the number of LPC students is also down 10% from last year, according to the Central Applications Board. 4,382 in June 2014 as opposed to 4,865 June 2013. Whilst prospects are definitely improving for law students, it is unclear whether the need for junior lawyers will ever return to pre-2008 levels.


Trainee pay 
The SRA has always set a minimum salary for lawyers, which has been a relief for many starting out in the profession. However, as of 1st August 2014 this will be scrapped and firms are now entitled to pay as little as national minimum wage, currently £6.31 per hour (I would know, to pay for university I worked in a bar on that salary).

Those in support of scrapping the minimum salary believe the move will encourage firms to take on more trainees. There is also a general attitude that there is nothing particularly special about being a lawyer that should warrant having a minimum wage above the national minimum, which is almost unheard of in other professions.
- Those against say it will mean future lawyers desperate for a training contract are open to exploitation.

It's becoming clear that this move will only impact the lower end of the profession, with the larger national and international firms not reducing salaries. Indeed, some magic circle firms are even raising the trainee salary. As of Summer 2013, the SRA say the average trainee starting salary in London is £34,787. The lowest average starting salary is in Wales is £17,943. Lesson learnt from this? I am even more determined to live in London after I graduate.

Retention Rates
So you have secured a training contract, you are in your 4th seat and looking at your future. You will be glad to hear the the retention rate in 2013 averaged at 78.2% of trainees remaining upon qualification. Whilst there was a dip in 2009 and 2010, this has improved over the years since.

Final Thoughts
As always, English law remains popular with clients doing business deals and dispute resolution abroad, especially those done in the Middle East and BRIC countries. So even with this depressing outlook, one thing remains certain - the world will always need lawyers and any graduate who has the skills and experience necessary to demonstrate they will benefit a firm, they will always be able to make it in the profession. Albeit, just not as easily as for previous generations.