While the saying goes that things need to get worse before they can get better, experts now say that recent economic indicators suggest that, in 2013, some areas of legal will start to bounce back.
A pesar de que muchos afirman que las cosas deben empeorar antes de mejorar, los expertos ya ven, en este año 2013, ciertos indicadores económicos que reflejan un crecimiento en la economía.
Portugal and Spain are hardly seen in a particularly positive light of recent. Both face huge deleveraging processes and fiscal consolidation, and the legal profession is suffering right alongside its clients.
And as ex-President George Bush once said: “You may not like the hand you’ve been dealt but you have to play it anyway.” And this is especially true of Portugal and Spain and any country that is suffering at this time, say lawyers.
2012 saw mixed year-end results for Iberian law firms, with some showing a slight increase, while others continued to drop. Things may, however, be changing, and there are definite signs pointing to a more positive 2013.
Key developments in the markets are leading to a potential rise in certain practice areas, which, by the summer, could mean a huge rise in activity. Navigating these successfully, therefore, could see law firms having an altogether better 2013.
While lawyers would like to say that Portugal has turned a corner, many feel that is not yet the case and that most of the impact of the austerity programme is going to be felt in 2013. With the Troika bailout’s financial demands and the enormous increase in taxes, on the face of it things are not looking so good.
But a recent OECD forecast for the Portuguese economy expects the country to begin recovering this year, and the country’s European Central Bank (ECB) borrowing fell almost six percent at the start of 2013, as several banks made early repayments on their crisis loans.
Last year Spain had to pay back the ECB around 10 percent of its GDP, which meant a 10 percent drain on the country’s resources, says Pablo Díaz de Rábago, Economics Professor at IE Law School, who leads his own private equity fund and board member on a number of highly successful companies. “But I’m optimistic that this year it could be around five, meaning there’s going to be five percent more GDP than last year to create real value instead of just paying down debt.”
And while the reality is still that the Spanish economy is in the midst of a huge deleveraging, the recapitalisation of the Spanish banks, he adds, is actually a positive sign as it means the real estate market could be re-energised.
For law firms, the start of the year has also brought a somewhat more positive outlook as people are adjusting, say lawyers. “Everyone is adapting,” one Spanish Managing Partner says off the record. “They are going for more flexible models, freezing or reducing salaries and, of course, dealing with size.”
But while last year’s rumours had Iberian law firms about to collapse under their own weight, this year a more realistic attitude is coming through.
“I don’t believe that overcapacity is going to be a bigger issue than it was in 2011 or 2012,” says João Vieira de Almeida, Managing Partner of Vieira de Almeida. “Yes, some firms will have overcapacity, yes some partners will leave, and yes some juniors will leave. But all in all it´s business as usual.”
And the fact is that the issue of size was already there way before the crisis. “Some firms, not just the big ones entered into a sort of ‘prestige championship’ – who has the best offices etc – and just being big for the sake of it,” says João Caiado Guerreiro, Managing Partner of Caiado Guerreiro, “and now they are suffering for it”.
Specialist firms are popping up with more frequency than in recent years as the lure of simple management, low overheads and the potential for a better salary or career progression is prompting some partners to leave the big firms. Some offer a full service, while others choose to be niche. But the risk with being niche is that if the demand is not there, then there are no other services to fall back on.
Handling size and structure has and will continue to be a priority for law firms, and this inevitably leads to the question of the three ‘R’s – redundancies, remuneration and rising to the top.
While law firms are adapting and restructuring, say lawyers, and given last year’s drop in activity levels, redundancies were an inevitably consequence. But everything is done very silently, and people leave by attrition, says Rui Amendoeira, Managing Partner of Miranda Correia Amendoeira & Associados. “Sometimes you realise the law firm is shrinking just by looking at a directory from one year to the next and seeing the headcount.”
While suicide pricing was one way of fixing the problem in the short-term, the issue of excess capacity is most definitely being dealt with by dismissals across Iberia. “We are seeing collective dismissals, it’s just no one talks about it,” admits one Spanish Managing Partner off the record, “but this doesn’t mean that firms are going bankrupt or that the world is ending, it’s just that the good times couldn’t last forever and they are now having to adjust.”
The view, say lawyers, is that redundancies are good business sense in an unfortunate situation.
Salaries have lowered significantly from the good old days in line with the stagnation of the markets, and the variable part of remuneration – the bonuses and the premiums – have been cut or reduced for most firms. “Considering that a number had a system where the variable part was significant – 30 or 40 percent, for example, and even in some cases 50 percent,” says Amendoeira at Miranda, “that can have a significant impact on what people can earn. And that’s something that has clearly happened.”
The new tax increases are also having an added impact, and managing partners agree that it hasn’t been easy to convince their lawyers that tax increases are affecting everyone at the firm, including the partners. But they agree that people now understand that, because of the current economics of law firms, past salary levels are no longer possible and are slowly adjusting their expectations accordingly.
Rising to the top
During the boom years, managing partners say they would have people knocking on at their doors asking to become a partner or threatening to look elsewhere, whereas you don’t see that anymore.
Junior lawyers are now very conscious about what is going on in the market, and the difficulties law firms are facing, adds José Luís Arnaut, Managing Partner of CMS Rui Pena & Arnaut, “so they are much more aware of how this can affect their careers”.
Interestingly, however, there have recently been a number of firms promoting new partners – for example, Garrigues, Gómez-Acebo & Pombo, Pérez-Llorca, PLMJ and SRS Advogados among others. But promotions aren’t necessarily a positive sign, as they don’t necessarily mean growth but rather holding onto the talent. “In some cases, it’s a defence move – you make them partners so that they don’t leave,” says Amendoeira at Miranda. “Or a more cynical interpretation is so they share in the risk as opposed to being a fixed cost.”
But it’s not just a problem facing juniors. “Everyone’s career is more difficult,” says Miguel Riaño, Managing Partner of Herbert Smith Freehills in Madrid. “There is less work and therefore the current working model needs to be re-adapted and improved to face the changing needs of the business and the market.”
Aside from these hurdles, however, there is some good news in store for the legal community – in some areas, activity is actually on the rise, and is set to grow as the year progresses.
Lawyers have told Iberian Lawyer that while 2012 started better than expected, the last quarter has been difficult, although many report a good start to the New Year.
And while past years saw investors fleeing the markets, fresh money is finally coming in. US pension funds, for example, and other investors are starting to look at various sectors that were hit by recession in which they can buy low cost assets. “My perception is that big companies already have access to capital markets and this will slowly start to improve for the rest of the market,” says Díaz de Rábago. Before the crisis, Spain, for example, had around 1,000 companies with access, whereas now there are around 20. “By year-end we may have around 80, which is a big change and will generate a lot of activity for law firms.”
Banks will need to rely heavily on law firms to sell assets or set up their own ‘bad bank’, and some distressed loan portfolio activity has started in Spain. At the moment, only for about five percent of the loan portfolios, but when it applies to 50, says Díaz de Rábago, former Partner at Gómez-Acebo & Pombo, and that’s going to be huge revenue stream for law firms.
Portugal’s debt agency has also said that it expects the country to regain full access to bond marketing funding over the coming months, which will not only mean a potential exit from the bailout, but also a rise in transactional work as well.
But real estate is where the biggest opportunities are going to exist. Large funds are already looking at the Iberian markets, trying to find people to run their practices, set up offices and build relationships with banks, explains Díaz de Rábago. “And that is going to be a practice area that will start picking up after the summer as soon as real estate adjustments start happening.”
And this could all prove to be very good business for those law firms able to assist these funds in their transactions.
Better times ahead
This year is therefore the year where the ‘positive’ news is hopefully going to at least match the ‘negative’. Things are happening, agree lawyers, and those firms already focused on these emerging areas of work could have a very good year.
“You need to make sure that you have the mechanisms and incentives in place for people to go out and seek new business, attract new clients and keep those that you have,“ says Vieira de Almeida. “But above all, you need to be prepared to react very swiftly and flexibly so as to keep your costs and your bottom line under control.”
Banking and finance, and real estate will be the top contenders for ‘Sector of the year’, and the restructuring of debts is going to involve at least a five-year mammoth effort to put pricing to where it should be, adds Díaz de Rábago. Law firms need to position themselves to pick up on this activity, and reinforce these practice areas if they haven’t already.
“The legal profession is like any other,” says Riaño. “If you’re not in front of what’s happening and don’t anticipate the events, then you will suffer.”
2013 is there for the taking, therefore. But law firms must act now or pay later.