The Good, The Bad & The Ugly
by Marcus Ollig
"The gentleman's profession of the law is becoming a vestige of the
past, removed enough from reality to be remembered, like phone booths or fedoras."
New York Times about major law firms, June 15, 2009
It's hard to believe there is any good news—but there is. In conversations
with law firm leaders, corporate executives and attorneys, both locally and nationally,
a more complete picture emerges. It shows we may have hit the bottom of this recession
and that firms are better positioned for the rebound. Also, the difficulties of
the past 18 months have resulted in some profound positive changes in law firm
management.
While there will be more staff and attorney layoffs in 2009, the pace of cuts
should continue to slow toward the end of the third quarter. Economists I trust
and many law firm partners and corporate attorneys I speak to seem to feel that
the stimulus package is starting to free up credit markets, which will spur more
corporate transactions and real estate activity. It is undeniable that the worst
economy since the 1930s has had a severe impact on the legal field. The negative
headlines about layoffs and failing law firms obscure the fact that many practices
and firms are faring reasonably well. A number of law firms are using this time
to make significant positive changes that will improve those firms operationally
for the next generation of lawyers. The following patterns emerged from conversations
with attorneys over the past few months.
Nationally
While this recession has seemingly had a record number of law firm lay-offs, the
most widespread cuts are concentrated in large money center markets or formerly
hot real estate markets. The most affected markets include New York City, Chicago,
the San Francisco Bay Area, Los Angeles and Philadelphia; Minneapolis and Charlotte
(banking concentration); Las Vegas and Phoenix (real estate), etc. There is some
pain in almost all markets, though it seems a matter of degree. The markets listed
have a large concentration of lawyers in practices hardest hit, including Corporate,
M&A, Securities, Banking and Real Estate. We saw those practices start to slow
down last year, even before the larger meltdown in the fall, which accelerated
things tremendously. Firms who have a large presence in these markets, or who
placed large bets expanding in money center markets, expanding internationally
or in the formerly fastest growing real estate markets, are struggling the most.
The Good News
- Confidence among Managing Partners nationwide seems to be up, reversing a
six-month trend according to a Citi
Private Bank Law Watch survey.
- The TED spread, a measure of risk-aversion in the credit markets, has receded
to pre-crisis levels. This, along with the fact that 32 banks have repaid their
TARP funds, should lead to an easing of credit and hopefully more deal activity.
- The economy, while not growing, may have hit bottom. According to the Commerce
Dept., new orders for durable goods climbed for the third time in four months
in May (by 1.8%). Firming of new home prices and some other positive economic
signals may mean we are starting, however slowly, to climb out of this recession.
- Among many clients, litigation activity is gaining momentum, particularly
in bankruptcy, employment, securities and even commercial litigation in general.
As this trend continues, it will hopefully counterbalance the weakness in M&A
and corporate work.
- Firms are getting creative! Alternative billing arrangements, merit-based
pay (versus the old lockstep model for associates) and associate training in both
the practice and rainmaking aspects of the profession are gaining steam. I believe
these will become permanent aspects of law firm life.
Denver / Regional Markets
In places like Denver and other Midwestern or regional markets, diversified firms
have fared best. Highly specialized firms that rely heavily on Real Estate or
Corporate practices have had the hardest time. Also, firms that placed bets in
2007 or 2008 in some of the hot real estate markets of the time (including Nevada,
Arizona and Southern California) struggle more. However, that strategy may pay
off in the long term for those who can weather this storm, since Denver and other
Midwestern firms enjoy economic advantages in some of those markets and synergies
with all of them. Mid-sized regional firms, including Denver firms, while generally
seeing softer demand for their services, tend to be smaller and therefore more
nimble at shifting focus in their corporate practices or working smaller matters.
They can keep workflow steady if not busy.
Many law firm executives I speak to are using the scalpel versus the hatchet,
They are considering other options to laying off large numbers of associates.
Pay for associates has risen dramatically (especially on the coasts) in the past
few years. Many people I talk to see a huge benefit in reducing salaries from
6%-10% across the board versus laying off people. I expect to see a number of
such announcements (as we already have nationally) in the coming quarters. Several
Denver firms have already quietly taken the plunge. While difficult, this strategy
represents a number of significant advantages to additional layoffs.
There also have been significant layoffs here. Most have been the quiet, smaller
reductions of a few attorneys and have been more focused on staff. During the
tech bubble burst recession of 2000-2001, there was a national firm that cut fully
half of its Denver attorneys and staff. There has been nothing as drastic this
time.
Generally, most local law firms are not as busy as in 2007 - but that was an exceptional
year. National firms with very small local offices that lack strong local ties,
or weaker local firms may be ripe for mergers or even dissolution. While there
will continue to be some associate layoffs in the coming months, I see more of
a focus to cut staff and reduce attorney pay coming. This is still bad news, but
pay cuts are better than layoffs and in the long term provide a better cost structure
for law firms.
Well-Positioned
While reliant on the national economy, firms in this part of the country are faring
better than their large, national counterparts for several reasons:
- Local/regional firms are generally smaller, carry less overhead and are more
nimble than their national counterparts. Many carry little or no debt.
- They are not money-center focused in their geography or practice mix.
- Work is starting to shift to the center of the country and to mid-sized or
regional firms. Many local and regional firms have a long track record of sophisticated
work and nationally regarded practitioners, but they enjoy tremendous cost structure
benefits by being headquartered in Denver, Kansas City or Midwestern markets.
Corporate legal departments are cutting costs by 11.5% on average (National Law
Journal). Using Denver or regional firms where rates are typically 10%-20% lower,
allows them to get their work completed more efficiently without taking on more
work internally.
- In a market like Denver, leverage between partners and associates tends to
hover around 1:1. This is hugely advantageous when the economy slows dramatically
since firms here carry less relative associate overhead.
Growth
There are still practice areas and even firms growing, both in Denver and regionally.
- We have seen a well-defined up-tick in Employment litigation, Securities litigation,
Bankruptcy and Public Policy work.
- General commercial litigation, which was mentioned as not having picked up
in this downturn as it did in past ones, is definitely picking up.
- There are early signs of some more corporate transactional activity as well.
- Generally, firms with a high value proposition (in terms of the bill rate
to level of attorneys/experience) seem to be faring best.
My hope is that the worst of this recession, if not all of the pain, will be behind
us in Denver and similar markets by the end of this year. There will still be
pain, and it will affect law firms as it would any business. However, the factors
above as well as the underlying realities of our economy here should help us weather
the worst of what much of the country is experiencing.
Marcus Ollig is president of The Advocates,
a legal search, staffing and consulting firm. His practice
focuses on mergers, consulting and lateral partner placement.
Phone: 303.825.2600; email: mollig@targetedlegal.com.
