JUST after the collapse of Lehman Brothers last year, at a lavish Clifford Chance party held at Goldsmith’s Hall, a French lawyer told me glumly: “London used to be such a good place to make money.”<br /><br />The champagne and canapes might have been flowing at the time, but the words did capture the feeling that the era of record profits was over. Clifford Chance, formerly the world’s largest firm by revenue, posted a profit per equity partner (PEP) drop of 37 per cent to £733,000 a little under a year later.<br /><br />Almost all City firms have felt the same pinch. Ashurst’s PEP dropped by 35 per cent to £673,000, Norton Rose’s fell 17 per cent to £517,000 while equity partners at Allen & Overy will have £122,000 less in their pocket this year, making do with £1m each.<br /><br /> Profit is an obsession of law firm managers but the effect of PEP drops on individual lawyers may be minimal. One City partner, who has seen his pay slashed, says: “I have exactly the same number of yachts as I did last year: none. I don’t think it has a huge impact on individual people in an organisation.” <br /><br />Lawyers are unique in the City, and are a different breed to bankers and traders. Whereas many of the latter may be lost without their six to seven-figure bonuses, law firm partners tend to live within their means and the falls in profit, although in many cases severe, have not translated into changes to their quality of life.<br /><br /><strong>NOT EXACTLY UNDERPAID</strong><br />The partner adds: “I think, even considering the fall that Clifford Chance has had, we’re not exactly underpaid are we? From a personal perspective, and as someone with a ridiculous number of children, I’ll probably be working until I’m 85 anyway.”<br /><br />Earnings are paid out to individuals about a year after they are declared, giving partners a natural safety net to help them adjust. This, says Norton Rose chairman Stephen Parish, gives them time “to change the holiday in Aruba for one in Cornwall” and adjust to the change in income.<br /><br />He adds that, with lawyers being a cautious bunch, “the impact is more likely to be on how much you save each year, rather than how much you spend.” So, if falls in PEP of up to a third are not enough to put lawyers off their stride, then what explains the legal market’s preoccupation with the figure?<br /><br />The answer, in a word, is competition. Parish says: “You need to remain profitable because we’re in a very competitive marketplace. If firm A has a higher PEP than firm B then firm B is going to have a harder time looking for and recruiting partners.”<br /><br />Clifford Chance has found itself in this position, perhaps for the first time in its history. In May corporate high-flyer Adam Signy defected to US firm Simpson Thacher & Bartlett, which last year reported a PEP of $2.48m (£1.47m). Others are not convinced that PEP is the only recruitment tool that matters, saying that prospective stars look at the prospect of future earnings rather than past and present, like any canny investor.<br /><br /><strong>COMPETITION</strong><br />A law firm which registers a profit drop because of investment in new overseas offices or IT infrastructure is in a different position to one that maintained profitability but is not set up to take advantage of a recovery in the economy.<br /><br />The strategy behind the numbers is more important for potential partner hires than the bare figures themselves. “What people are concerned about is the future rather than today,” says another City partner. Some commentators have also said that firms that attract star partners try to maintain an open and collegiate working culture in bad as well as good times, despite a dip in profitability. After all, they will be spending a large portion of their life in the office. In this sense, PEP competition has less to do with practical concerns like recruitment and more to do with bragging rights and keeping up with the Joneses.<br /><br />The competition is evident in the great lengths law firms go to in keeping their PEP high in comparison to their peers, even to the point of manipulating the figures behind the scenes. One City partner suggested that a high-profile City firm had reported its PEP based on the number of partners that would be remaining at the firm after downsizing, rather than the current amount, to prop up the figure.<br /><br />London might not be as great a place to make money as before, but most partners are individually well protected against the downturn, even if their firms are not. The obsession with profits is therefore more about ego than most partners would like to let on.