The last recession hit the City legal market hard.
The top firms launched unprecedented restructurings, slashing thousands of jobs as credit dried up and deals ground to a halt.
Magic Circle firm Allen & Overy cut nearly ten per cent of its workforce worldwide, ditching 47 partners, 200 junior lawyers and 250 support staff.
One former A&O partner let go in the cull remembers: “It was brutal…it was a literal decimation.”
After an 11-year bull market which has allowed City law firms to regain their financial crisis losses there are worries another downturn could be on the way.
How would London’s legal market cope with a fresh financial shock? And will law firms be better prepared this time round?
City law has changed over the last 10 years, with longstanding brands now absorbed or diminished and an explosion of US law firms taking on the traditional elite.
The growth of US firms has forced domestic firms to focus on profitability and dispense with underperforming partners and practice areas to counter the loss of talent to their high-paying US rivals.
“The market is even more competitive – partly because of the US firms – than it was at the time of the last downturn…there is less flab then there would have been in 2008,” Macfarlanes senior partner Charles Martin says.
However, competition with US firms has also driven salary inflation for junior lawyers.
In May, Magic Circle firm Freshfields Bruckhaus Deringer raised salaries for newly qualified (NQs) lawyers to £100,000 – prompting its UK rivals to follow suit.
Tony Williams of legal consultancy Jomati says: “When you see NQs getting over £100,000 a year…that is a shedload of money.
“I always say be careful what you wish for. If you have got a high cost base, if the work is not there you are going to have a fairly short shelf life.”
A US firm partner says: “They [the Magic Circle firms] are increasing their fixed costs to stop the bleeding, if the music stops I would have thought that would be a bit of a problem for them.”
However, with sterling already trading low against the dollar, Magic Circle partners question whether US firms would continue to support their London operations in the event of a sharp slowdown.
One says: “If things start stagnating I have my suspicions as to how people will react… generally lawyers, and particularly lawyers in the New York market, are not the most charitable.”
A US firm partner hits back saying: “That’s wishful thinking, if you are looking at 2008 the guys hit the most were the Magic Circle… I would rather sit at a US firm than a Magic Circle firm when the music stops, in terms of size we are much smaller than those guys.”
Legal recruiter Dominique Graham of Signium says the larger US firms in London are likely survive a downturn, but smaller US firms that have been less successful could rethink their City bases in a sharp recession.
“When the chips are down anyone who hasn’t been doing well before cops it,” she says.
The leading firms are probably in a better position to weather a downturn than they were in 2008.
Graham says: “The last recession has made firms a lot more weatherproof and a lot better prepared to face another one.”
However, with increasing fixed costs and the lessons of the last recession in mind, firms are likely to make cuts quickly if billings dry up.
“If work tails off they have extensive resources not being fully utilised…I imagine they will be more aggressive in letting people go when the need arises,” says Giles Murphy, head of professional services at accountancy firm Smith & Williamson.
City lawyers still remember the trauma of the last recession and know that firms will be hard-nosed in protecting profitability if things go wrong again.
The former A&O partner remembers: “We were still there for months whilst it was worked out and we sat in the garden.
“It is quite emotionally painful if you are constantly going into an office where everyone knows what has happened.”