Why are big firms with partners averaging $500K+ a year laying people off?
by Mark A. Cohen Editor-in-Chief
“With a share-the-pain approach, you do it at the risk of losing your most successful rainmakers.” — Attorney/ coach Roy S. Ginsburg |
Industry analysts who spoke with Minnesota Lawyer said the cost cutting at a time when partnership profits are healthy is perfectly understandable, and, if done strategically, prudent.
If firms let their partners take the full hit of declining revenues without spreading the pain among the associates and support staff, rainmakers will walk, taking their best clients with them, explained Dan DiLuccio, a principal at Altman Weil consulting group. “It’s happening right now,” he told Minnesota Lawyer. “Firms are actively looking for rainmakers.”
In the current economic climate, some practice areas, such as mergers and acquisitions, are pretty much dead. Other areas, such as bankruptcy and business litigation, are booming. If a firm allows partnership profits to fall too far because of the slow practice areas, it may lose an entire busy practice group to a rival firm that strikes a better deal.
And that’s not just a theoretical threat. The largest law firm failures in state history — those of Rider Bennett (2007), Doherty Rumble (1999) and Popham Haik (1997) — were all preceded by these types of defections.
The following description from a 1997 Star Tribune article on Popham shutting its doors provides a textbook example of what firms today are trying to avoid:
But as of Friday the long slide for a law firm that once was ranked by a national publication the 103rd-largest in the country has come to a definitive end.
Minneapolis attorney LaVern Pritchard, founder and head of the LawMoose site, acknowledged the potential is out there for a big firm to offer a sweet deal to a rival’s most lucrative practice groups and thereby gobble them up.
“It’s just like the last of the dinosaurs eating the other dinosaurs,” Pritchard said.
Attorney/coach Roy S. Ginsburg told Minnesota Lawyer that if firms don’t make the top client-getters happy, “they’ll find a new home. With a share-the-pain approach, you do it at the risk of losing your most successful rainmakers.”
When it announced its across-the-board salary cut, Dorsey made special provision for bonuses that could be given to its busiest attorneys to reward them for their efforts. While such a structure could be viewed as promoting fairness by rewarding those working the hardest, it also could be viewed as a way to incentivize lawyers in the most lucrative practice areas not to defect from the firm.
Historically, the revenues from the busy practice areas have been used to subsidize the slower practice areas. But busy lawyers with a potentially portable client base will most likely only be willing to carry dead weight for so long, particularly if per-partner profits start to drop precipitously.
No one knows what to expect when the next AmLaw 100 list comes out listing law firm revenues and per-partner profits, but the consensus is that for many firms it won’t be pretty. And without cost cutting, the picture will look a whole lot worse.
Cost-cutting measures
Local big firms have taken a number of steps to protect their profitability in these lean times, including the lawyer layoffs of Faegre and a handful of other firms, the salary cuts at many more big firms, reductions in support staff (more than 50 at Dorsey alone) and the de-equitization of partners.
Ginsburg said that the most surprising thing about the way that big firms locally have responded to the economic downturn is that there have not been more layoffs. On the East and West coasts, thousands of lawyers have gotten their pink slips, but big Minnesota law firms are either less willing to resort to layoffs, or have not been hit as hard by the downturn. Salary reductions rather than layoffs have become de rigueur here.
While law firms in Minnesota and elsewhere reportedly have been stepping up their efforts to rid their ranks of less productive partners, this is usually done quietly, so numbers are not available.
Technically, eliminating partners isn’t cost-cutting. Cost-cutting goes to making the partnership pie bigger; keeping down the number of partners has more to do with the number of pieces into which you divide that pie.
Ed Poll, a law-firm management consultant with a business of law website, LawBiz.com, said the bad economic climate is likely to play a part in fewer fifth-, sixth- and seventh-year associates getting the partnership nod. While firms might not say they are changing their standards, in lean times there is a de facto heightened scrutiny, he explained.
“It will, of course, vary from firm to firm, but overall, it will be harder.”
The lawyers with the best chances of making the cut will be the rainmakers, and those in “hot” practice areas, Poll said. It will be harder for transactional lawyers to make it given that there is not enough work to go around, he said.
Ginsburg also stressed that a lawyer’s business development skills have become more crucial than ever in determining whether that lawyer makes partner.
“It used to be that a lawyer just had to be good and bill enough to make partner,” Ginsburg said. “[This economy] may drive the nail in the coffin on those days.”
While senior associates are grappling with reduced partnership opportunities, it’s the incoming crop of new lawyers who are suffering the most. Many of them have seen their start dates deferred and pay cut before they have even got a paycheck from their firm. Not to mention the young lawyers who will not get a chance to work at a big law firm if the firms start scaling back on their hiring.
A hiccup — or more?
Many big law firms are still treating the current environment as market fluctuation and the steps that they are taking as stopgaps until things rebound and they can go “back to normal.”
Experts who spoke with Minnesota Lawyer said it’s too soon to tell if the big firm model will survive the current downturn intact as it has in prior downturns. Although they expect that the inefficient business model used by big firms will eventually have to morph or go extinct, they believe that big firms will have to evolve a lot faster if things don’t turn around soon.
Already many big firms are abandoning lockstep salary increases for classes of associates, opting instead for increases based on individual performance.
Altman Weil’s DiLuccio said a lot of big firms were “on autopilot” before the downturn, and now there is an increased awareness of client needs. He has even heard of some big firms sending out lawyers to mid-sized companies to peddle their services and offer special deals.
Asked what advice he’d give big law firms trying to prosper in the current economic environment, DiLuccio said he had three tips: “Focus on your clients; focus on your clients; focus on your clients.”
Pritchard predicts that big law firms will finally delve meaningfully into new technologies, including social media, to increase their efficiency and reduce their cost structure. While big law firms have availed themselves of office technologies such as e-mail and word processing programs, they have not married their legal expertise to technology in substantive ways, he explained.
Pritchard said the current economic climate could stimulate entrepreneurship, which could, in turn, lead to innovations that big firms will have to follow in order to compete. “There are a lot of talented lawyers looking for work,” he explained.
The experts who spoke with Minnesota Lawyer said that they have heard anecdotally of big law firms that have quietly offered some of their best clients reduced rates in order to retain them. However, none of them believes the billable hour, the oft-criticized staple of law firm billing, is going anywhere soon. They do predict, however, that alternative fee arrangements will be on the rise. (On the other hand, experts have been predicting that for years.)
Big law firms tend to be behind the curve when it comes to change, according to Pritchard. Because of all the challenges big law firms now face, “I’d be scared to be a managing partner right now,” he said. “Of course, I first said that back in 2000.”
Without knowing the length and breadth of the current downturn in the legal services sector, it’s impossible to be certain what the ultimate ramifications will be. One thing, however, is abundantly clear: “All bets are off,” Ginsburg said.
