The “magic circle” has lost some of its power: average hourly rates for London’s top commercial lawyers fell by a third last year as law firms offered substantial discounts after competition intensified in the downturn.
Partners at London’s five elite firms billed an average of £450 an hour, down from £675 a year ago, according to Jim Diamond, an independent legal costs consultant.
Mr Diamond said that the figures, collated from law firms and their clients, showed that the average cost of instructing a partner at Allen & Overy, Clifford Chance, Slaughter and May, Freshfields Bruckhaus Deringer or Linklaters had dropped to a five-year low.
According to lawyers and their clients, the largest law firms, battered by the recession, are “falling over themselves” to cut prices in an attempt to retain business.
Banks are said to be the hardest bargainers. One magic circle partner said: “Those banks that still have a steady flow of business know how valuable they are and are demanding cuts of up to 30 per cent, safe in the knowledge that if their current law firm does not like the reduced rate, a rival will gladly pick up the work.”
The UK general counsel of one global investment bank said: “Last year I spent £750,000 on securitisation work. This year I expect my bill will be around £300,000. Of course, some of that reduction will be because there is less securitisation work around, but a large proportion will be due to cheaper rates.”
Mr Diamond, whose research was first published in The Lawyer, said that he knew of one instance in which comparable firms had given quotes that varied by 60 per cent.
Deepak Malhotra, general counsel of the European division of Constellation, the American drinks company, said that he had experienced “significant discounting” by law firms across the board: “Several of our regular firms approached us and offered discounts of up to 15 per cent.”
He said that there had been little resistance when he suggested to his other regular legal advisers that they did something similar.
At the same time, aggressive smaller law firms, which offer lower rates but often comparable service, are moving to try to take share from bigger rivals.
Straight discounting is not the only reason that average rates at magic circle law firms — which in the past have advised on the largest, most complicated and sought-after transactions — have fallen. In addition, lawyers are finding themselves forced to take on less well-paid work. One general counsel said that until last year he had split his property work, using a magic circle firm to advise his company on higher-value matters, with the rest of the work handled by the Manchester office of a regional law firm. That changed this year when the more respected of the two firms offered to take on the regional firm’s workload and match its hourly rates.
With the top firms paying London rents and salaries but charging the same fees as regional law firms, Mr Diamond predicts further pain for the industry.
Some of the fee reductions over the past 12 months have already fed through to static or lower profits at the four magic circle firms that release results.
Describing the state of the industry as “pretty varied”, Mark Rawlinson, head of the corporate department at Freshfields, said: “Clients are understandably looking to reduce their legal costs, but fees still vary depending on how important the work is.
“Some of the clients we are working with are looking for more price certainty and alternative pricing strategies.
“Where clients want hourly rates as the charging basis, there is a trend towards continued discounting, mainly as a result of the supply side currently exceeding demand.”
Regulatory cases offer healthy rates
Prices may be falling on IPOs and property deals, but there are areas of the law where attempts at haggling will get you nowhere. The most recession-proof areas are those that deal with reputation, career and liberty.
Lawyers say that people such as the NatWest Three — Giles Darby, Gary Mulgrew and David Bermingham — who unsuccessfully fought extradition to the United States, tend not to quibble over fees for someone they hope will help to keep them out of a foreign jail.
This survival instinct means that London’s regulatory lawyers are enjoying a boom defending individuals from an unprecedented wave of criminal and civil prosecutions from regulators. The limited band of lawyers with experience defending against Financial Services Authority, Serious Fraud Office or Office of Fair Trading action are holding up rates, if not raising them.
Corporates are also in the line of fire from regulators and are not scared to spend on the best advice to clear their names. Siemens paid about $850 million for advice relating to its recent bribery inquiry, a chunk of which went to its lawyers at Debevoise & Plimpton, the Wall Street law firm.
The administrators salvaging Britain’s biggest corporate failures are less likely to argue about price. Lawyers said that with hundreds of billions of dollars at stake in the Lehman Brothers collapse, those involved would pay for the best possible advice.
Source : Times Online
