Disappearing act

Jun 01, 2009
<p>US law firms, largely immune to this point, are feeling the effects of the financial crisis. Billing costs are falling but serious experience risks could emerge</p>

Law firms have long been seen as a breed apart as employers, seemingly immune to market forces. Their model has been to hire students just out of school, based on pure potential, and then develop them into partners and senior counsel, or place them well in the law departments of corporate clients. The fact that scores of firms, even the wealthiest and most prestigious, have been casting off associates in unprecedented mass layoffs is big news.

The legal blog ‘Above the law’ – in association with  legal blog ‘Law shucks’ – keeps a well-read ‘layoff tracker’, reporting that, as of May 9, over 4,672 lawyers have been laid off by major US law firms since January 2008. Over 80 percent of those layoffs occurred in 2009. Law firms are also slashing associate salaries across the board, cutting back deeply on summer hiring programs, and asking 2009 law school graduates to delay their start dates by as much as a year. The picture is even graver when taking non-lawyer employees into account. In addition to the 4,672 lawyers who have been shown the door since January 2008, 6,913 administration and support staff have been let go – 5,851 this year alone.

Although many lawyers say that in previous economic slumps they did notice employees at banks and in industry getting culled, ‘with lawyers, you felt you were safe from that kind of threat,’ says one in-house counsel and corporate secretary. ‘Now that’s no longer the case. We talk about how shocked we are to hear it.’

All about the money
Cutbacks result from companies spending less on outside counsel during this recession. In terms of overall numbers, the cuts so far don’t look too drastic, but no one is certain how deep they will go. BTI Consulting Group, a provider of strategic research to law firms and in-house general counsel, predicts an overall decline in legal spending by companies of 1.4 percent in 2009. ‘We’re seeing a slight uptick in outside counsel spending after a 7 percent decline in the first quarter, as companies hire counsel to cover core needs,’ says Michael Rynowecer, president of BTI Consulting Group, who recently polled 370 corporate counsel at Fortune 1000 firms for a benchmarking report. He adds that if the Q1 rate held, ‘that would be equivalent to a 28 percent annualized rate, which is phenomenal.’

Corporate counsel, who continually challenge increasing legal bills, say big firms need to greatly increase efficiency. ‘Most think it is certainly appropriate,’ Rynowecer says. ‘They wish law firms well, but they are happy to see them react quickly and take steps to take care of the problem. There had been the perception that law firms don’t have the sensitivity to cost cutting and cost constraints that corporate America does.’

While most in-house counsel are happy to see an increasing move to more cost efficiency at the law firms they employ, many, given the uncertain global financial environment, may worry about how their law firms will cope with such thinned ranks – especially when handling litigation and M&A deals, which often require legions of associates. ‘You don’t see how law firms make up for a lack of staff,’ says one senior in-house counsel with a secretarial role. ‘I’m assuming they just drive the remaining people into the ground.’

So far, in-house counsel are not attesting to seeing the quality of advice suffer, at least on corporate secretarial issues. ‘My sense is that the work we hire firms for is not being affected,’ says this secretary. ‘It’s not work that is associate-intensive. Board and governance advice tends to come from the most senior lawyers. Those people aren’t being let go.’

Rynowecer sees the cuts as better aligning the goals of law firm and client. ‘I haven’t heard any general counsel worried about staffing,’ he notes. ‘If anything, staffing has improved. Clients feel they are getting a bit more senior-level attention and seeing very clever use of more junior people.’

Focus on the bills
Corporate counsel are pushing law firms to rethink the billable-hour model, which some think rewards inefficiency. In a recent podcast by Thomson West, Robert Haig, editor-in-chief of Successful partnering between inside and outside counsel and a Kelley Drye & Warren partner, said that generally there has been far more talk than action around changing how law firms charge for their work, noting research showing about 15 percent of outside counsel work is charged on an alternative basis. Other surveys show that the billable-hour model is being relied on more than ever. Haig added that cost pressures in the economic downturn could encourage more options such as fixed or flat fees, volume discounts and early payment discounts. His book goes into detail about these and other ideas for maximizing the value of corporate legal services, including using contingency fees on the plaintiffs’ and defendants’ sides for achieving a good result; using lawyers earlier on in the design or conception of a project to spot potential problems; and using contract attorneys to do work formerly done by law firm associates.

A watershed moment arrived in January when Evan Chesler, a partner at an elite and traditional firm, Cravath, Swaine & Moore, called to end hourly billing in an interview in the New York Times in which he pointed out how Cravath is doing more work on a flat-fee basis, earning success fees for positive outcomes and meeting other benchmarks. He said such fee arrangements covered just a fraction of Cravath’s matters. ‘Firms at every level are experimenting with alternative fee arrangements, but we’re seeing it mostly at mid-sized firms,’ Rynowecer says. ‘There is more talk about fees, alternative fee arrangements and different approaches to billing than there has been in the last 20 years.’

Fighting over who does what
Companies are also taking a very close look at how firms staff matters. A sort of ‘war on first-years’ has developed, with in-house counsel refusing to pay for time billed by entry-level associates, as those associates’ starting salaries escalated in major markets to around $160,000 per year. ‘It is causing friction between some law firms and their clients,’ Rynowecer says. ‘They are using it as an opportunity to visit alternative fee arrangements. We’re seeing a different use of first-years, in terms of research and training.’

In-house law departments might pick up some of the laid-off lawyers, or take in associates in secondments, common to the UK. ‘Corporate counsel really need help,’ Rynowecer says. ‘We’ve been waiting for that to happen.’ One in-house counsel, who requested not to be named, agrees: ‘I like those kinds of arrangements, but not every company is willing to do that. I’m not familiar with how to make it work. It seems like a good way to go about getting in some good talent and getting your lawyers more familiar with your company.’

Some say lawyers who are idle in the recession should not worry too much about the impact of the financial downturn. ‘It won’t have a big effect. In every other profession, layoffs are an accepted part of reality. It’s that way for lawyers now,’ Rynowecer says. ‘Many people wish they had the opportunity to hire. They’re saying they’ve never seen so many good candidates on the market before.’

While stressful, observers say inside and outside counsel could benefit. ‘Law firms and their clients will come out of this with much stronger relationships,’ Rynowecer says. ‘There will be a lot more discussion about how to work together, as opposed to shots across the bow about discounts.’

Despite the potential pros – lower, dynamic fees, more efficient outside counsel firms and the opportunity for companies to obtain experienced new staff at a discount – there are risks. While associates and admin staff account for the majority of layoffs, many partners are also getting cut. Securities litigation may be relatively quiet right now (see ‘Where have all the lawsuits gone?’ on page 40), but when activity returns, will outside law firms be able to handle increased workloads and a complicated financial environment and provide top service? Only time will tell. In the meantime, in-house teams should take advantage where they can.

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