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Confidence is a funny thing. In business there is often too much of it, leading to bull-market excess, or too little, causing self-destructive flagellation. It is also another established rule that sentiment undershoots and then over-reacts before finally levelling out at somewhere near reality.

It is a theory that you can apply to law firms. Legal Week‘s quarterly business confidence poll last October, the first since the onset of the credit crunch, showed confidence bizarrely unchanged from boom-time levels, despite a string of gloomy headlines. By this month’s poll, conducted days after the fire sale of Bear Stearns, confidence had plunged across the board.

Yet the same poll finds partners more bearish about the prospects for legal services as a whole than their own firm. And talk to managing partners privately and it is clear that there are plenty of major firms still predicting solid growth for 2007-08. This suggests that confidence is as much being defined by outside factors as firms’ individual experiences, though no one disputes that the market has slowed considerably.

Similar tricks of perspective are at play in the labour market. This is partly because of law firms’ proximity to a financial services sector heading for substantial job losses. But close as law firms are to banks, they still operate a very different employment model. Consider some numbers. The accepted estimate for job losses in London’s financial services community after the dotcom crash is that 17,000-20,000 jobs were shed out of 350,000.

My back-of-the-envelope calculation is that around 500 jobs went during the same period in commercial legal services, including support staff, out of a pool of at least 50,000. Put another way, legal services workers were at least five times less likely to lose their jobs than financial services equivalents. Conversely, this also explains why staff cuts carry such significance in law: it is because they are relatively rare. And bear in mind that the 2002-03 cuts were after a period of major expansion and mergers that had swollen law firms’ cost bases.

This resilience has less to do with the supposed hedges of litigation and restructuring than the straightjacket of law firms’ business model and the pressures of international competition. Firms’ inability to grow quickly means they struggle to resource in booms but this limits over-capacity when the market slows. And top City firms, battling to get their profits to world-beating levels, kept a close eye on costs, even during boom years. The bottom line? Confidence is an unreliable narrator right now, but many law firm leaders seem to have quietly worked that out for themselves.

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