By Sarah Kellogg
By
any measure, today’s economic woes are brutish. Every day, the
disastrous nature of this historic economic cycle is brought home by
stagnant retail sales, declining gross domestic product, sluggish personal
income growth, and the feeling that the bottom might not yet have been
reached. The only statistic on the rise is the unemployment rate. It
is up to near December 1983 levels, the last time the economy went into
a protracted recession.[1]
Not surprisingly, law firms in Washington, D.C., and around the country are feeling the bite. The poor economy has provoked declining demand for legal services, called for wholesale cuts in fees, and frozen fearful associates in place, leaving law firms heavy with staff. Attorney and staff layoffs have become the standard for tending to this crisis. Anxiety has climbed as law firms respond to a consequence of the downturn—cash-conscious clients seeking a better return by demanding concessions in productivity and hourly rates. This truly is a time of insecurity and uncertainty.
“It’s probably going to get worse in the short run,” says Bruce MacEwen, a firm management consultant and New York lawyer who writes the law management blog, AdamSmithEsq.com.[2] “Law firms tend to be lagging indicators of the economy. That’s partly because clients don’t ramp up discretionary legal activity until they see clear and convincing evidence that they’re out of the woods, and then there’s a six- to nine-month cycle involved.”
Yet, this may also be a time of opportunity. This darkest of economic clouds hides a silver lining of sorts for those firms that capitalize on countercyclical activity, take advantage of Washington’s distinctive legal milieu, or use the recession as impetus for wholesale change in culture and structure. The upside might be the chance for law firms to reinvent themselves to reflect the sobering realities of the new economy. Observers say that after the unprecedented growth of the past dozen years—nearly double-digit increases in revenues and profits per equity partner (PPEP) between 2001 and 2007—some type of reassessment was to be expected, if not needed.
“People in our profession have had a pretty good run for a number of years,” says Rodney F. Page, managing partner at Bryan Cave LLP’s Washington office. “If you take a big-picture look at this, a course correction or an economic correction was inevitable, given the uncontrolled growth of the last few years. We’re looking at something like a 10 percent reduction across the board, which would then be followed by some sort of resumption of progress and growth. I don’t think any of us should be too negative about that.”
But this is not an equal opportunity recession; there are winners and losers, even in the legal community. Aside from the obvious victims—attorneys and staff cut loose from jobs to struggle in a failing economy—some law firms have been hit harder than others. The most drastic reductions are at the nation’s largest firms, many of which beefed up staff during the fast-living past decade and are paying the price now with cost cutting and layoffs. Meanwhile, smaller firms are weathering their economic troubles with a combination of moxie and an emphasis on the basics of customer service. Already operating under tight budgets, these smaller firms have managed to survive economic upheavals by doing what they do best: creating lasting relationships with their clients that endure through even the worst financial periods.
Another new reality is that a practice based in Washington offers no guarantee of immunity from a faltering economy. For years many experts believed Washington firms to be impervious to ups and downs because the city ran on its own cycle, one in tune with government as congresses and presidents came and went. No more. Though geographic and practice integration once translated into larger profits for Washington firms crossing the Beltway to Chicago, Dallas, Los Angeles, or New York, today it translates into shared misery as Washington firms with satellite offices or distant headquarters face serious belt-tightening.
The challenge for every law firm—no matter the type, size, or location—is to forecast what comes next. Leaders are having as little success in reading economic tea leaves as are financial wizards in predicting the Dow. Will the recession extend into 2010 and beyond, or will it taper off by December? No one really knows. Management teams are grappling with uncertainty to attempt short-term solutions—hiring contract lawyers, cutting administrative costs, reducing associates—as preparation for long-term profitability through trimmer staff rosters and more realistic budgets. The road ahead remains unclear, and the only winning formula may, ultimately, be going back to basics.
A Downturn With No Limits
The American Lawyer’s countdown of layoffs since January 1 is
a disturbing inventory of staff decimations. This online list drags
on as it notes firms, dates, and numbers of people laid off, a visual
account of the economic slide and its effects on the legal profession.
Worst of all, the end doesn’t appear to be coming soon, according
to industry experts.[3]
“We lost 1,800 jobs in January and February. We’ve seen things unique to this particular downturn that we’ve never seen before, not just double-digit layoffs, but layoffs in the hundreds by a single law firm,” says Susan G. Manch, principal at Shannon & Manch, LLP, a Washington firm that works with law firms to strategically manage change in leadership and practice areas. “This is stunning.”
Law firms are no strangers to cost cutting. In fact, in the past 20 years, firms made tough staffing decisions during two separate downturns. In 1991 the real estate crash and a general economic malaise spurred layoffs in large firms and a reevaluation of budgeting assumptions as firm leaders wrestled with a decline in profitability. Ten years later, the technology bust along with the terrorist attacks on September 11, 2001, prompted another spate of staff reductions, though most experts labeled those as “spotty,” not systemic, because that slump was shallower and shorter.
The first few months of 2009 have proven to be far different, however. Look no further than February 12, the so-called Black Thursday or Valentine’s Day Massacre of 2009, for proof. In a single day, law firms around the country laid off more than 700 people—staff, associates, and partners. The layoff count for major law firms for January through April 20 was 8,867—3,386 lawyers and 5,291 staffers—the largest number of layoffs ever seen in a four-month period in the legal profession in recent history. Since January 1, 2008, there have been a total of 10,659 people laid off by major firms.[4]
“The current economic downturn in the legal market is likely to be deeper and longer than any we have seen in the last two decades. Even though there will be upticks in certain practices during the coming year, we expect that 2009 will be challenging for most firms,” concluded the January 2009 Client Advisory from Hildebrandt International and Citi Private Bank.[5]
With 80 percent to 85 percent of a law firm’s spending earmarked for rent and personnel, it makes sense that associates and other staff were the first target for trimming. Experts estimate firms save about $250,000 for each associate released and about $100,000 for each legal assistant or staff member shown the door. Along with layoffs, firms also are trimming costs in more traditional ways—cutting down on travel, freezing salaries and benefits, canceling retreats and conferences, and reviewing expenses for publication subscriptions, black car services, and document management.[6]
“What’s been interesting about what’s happened is that once we shared where we were at with our staff, then all of them started to think about ways they could find savings,” Page says. “I don’t work in the mail room or the library so I don’t know where the savings can be found there. Our staff has come forward with a lot of good ideas for saving money by eliminating certain services or reducing the frequency. We’ve all pulled together.”
Washington law firms are reluctant to talk about layoffs, of course, no matter how universal and public. Many law firms declined to talk on the record about their decisions to lay off staff, saying these are personnel matters and thus considered confidential. While there is no exact count on the number of Washington lawyers and staff who have lost jobs, some estimate it at as much as 5 percent of the Washington legal labor pool. Suffice it to say, Washington firms have shared in the pain of the downturn.
Even if firms aren’t talking, there is much Washington gossip about which firms are laying off associates, rescinding offers to graduating third-years, or disguising “stealth layoffs” as departures due to poor performance. Even so, law firms are still making connections with law students at local law schools. “Last fall we were fortunate not to be affected by the national trend, and saw no decline in our on-campus interview presence by law firms and other legal employers,” says Gihan Fernando, assistant dean for career services at the Georgetown University Law Center. “Students did well in their interviews, and 2009 graduates will start jobs with law firms in numbers similar to prior years. Our second-year students also accepted summer associateships in numbers similar to prior years.”
But Fernando isn’t certain the good news will continue. “It is too early to know what the coming fall holds, but I would be surprised if all law schools, including Georgetown and others in the top tier, were unaffected by the widespread layoffs at many major law firms across the country. We fully expect that all our regular legal employers will return to our campus this fall, but they will likely be hiring more conservatively,” Fernando says.
The Gift of Government
Despite the gloom, there is some hope for Washington firms. That optimism
is rooted in the exceptionality of the Washington legal community, so
intimately tied to the favor of the federal government that it rises
and falls with the government’s rhythm, not just the ebb and flow
of the economy. The conventional wisdom is that Washington law firms
are immune to economic fluctuations. Observers say that wisdom is oversimplified,
noting the city’s large law firms are megalithic and exhibit the
kind of diversity found in any major firm in America.
Where Washington law practices differ is in their particular focus on government’s bread-and-butter activities—lawmaking, rulemaking, and appropriating. Additionally, law firms focus on business; the Washington metropolitan area has become a diverse corporate center in recent years, home to some of the nation’s Fortune 500 companies. “The Washington firms for years have built practices that are not just regulatory,” Bryan Cave’s Page says. “Many firms have real estate practices. The corporate market, in my opinion, has been underrated. This is the fifth-largest metropolitan area. There are a lot of businesses here that need law firms.”
And even Washington’s traditionally reliable regulatory work runs on its own boom-and-bust cycles. It can be as volatile as real estate in that it fluctuates based on the administration in power and the party that controls both houses of Congress. The past eight years have been a particularly dry time for regulatory work, mostly because the Bush administration showed little interest in promoting an aggressive regulatory agenda.
“Frankly, Washington enjoyed less of the huge escalation in profitability than did New York, California, or Chicago firms,” Manch says. “Washington lagged behind other cities and wasn’t a leader because of the preponderance of the Washington practice. The good news, the workload, it stays pretty steady. It’s a practice that is a local practice. It’s pretty hard to do Washington work from Los Angeles unless you have a branch here.
“But all the traditional Washington firms have so diversified that they are being affected by what’s going on now. Fifteen years ago they wouldn’t have been because they were so local. They were more insulated from their brethren in New York, Los Angeles, and Chicago. Now they’re not.”
Even as Washington firms and offices feel the pinch in 2009, it is far less acute than that felt by their counterparts in other cities, especially in New York where law firms once buoyed by financial services work were hit by the calamity in that sector. Washington’s advantage today is that with a new party in power in the White House and an emboldened Democratic Congress, government-associated legal work is expected to flow. Law firms are already gearing up for changed regulatory attitudes ushered in with President Obama.
“It’s pretty clear that we’re going to be in for some major regulatory reform, and if you’re a Washington firm with a big regulatory practice, it has to be good news,” MacEwen, the New York lawyer and management consultant, says. “It’s about the only law-related sector that I can think of that’s anything like a sure bet.”
The Bush years were particularly devoid of comprehensive regulatory programs, and the Democrats are already swiftly seeking to enact stronger oversight in capital markets, banking and insurance, the environment and energy, and consumer safety. Any and all changes in these arenas will create demand for lawyers. “Everyone is thinking that we are now the center of the universe,” says Maureen E. Dwyer, a partner at Pillsbury Winthrop Shaw Pittman LLP in Washington, “whereas Wall Street used to be the center of the universe in the 1990s. We are certainly the national center now, and you could argue that what we do here will ultimately influence what happens in other countries.
“We may be in recession for another year or for another five years,” Dwyer adds. “Regardless, there is going to be a good deal of work, and the government is going to have to do things—those things are going to impact our clients, and our clients are going to want to have a voice in that work.”
Some of that work will come into play during the implementation of the $787 billion American Recovery and Reinvestment Act of 2009, the stimulus package signed into law in February. Prospecting for business development opportunities will be easy with the stimulus bill, experts say, because there is so much money and so many companies are looking to get a share of the pot. That’s why a number of Washington firms have opened practice areas exclusively targeting the recovery act. For example, law firms that have represented construction companies on real estate projects are now assisting clients bidding for a piece of the $27 billion earmarked for roads and bridges.[7]
“Our job is to find the money and match it to our clients to give them an opportunity to make an investment,” Dwyer says. “We’re getting calls from our clients all the time now asking us what we know about the stimulus bill and whether there is something in it for them. We find out what there is and match them with key decision makers, then track what happens in the agencies. I think there’s enough opportunity in the package for us to have enough work to sustain us until the recession turns around.”
Curiously, another practice area that looked to be a countercyclical favorite was litigation, but it has yet to materialize as the real profit center that many firms expected, despite all the lawsuit potential of the financial services debacle. “People are wondering where all the litigation is, but it’s complicated,” says MacEwen, noting that Ponzi scheme investor Bernard Madoff is a prime example. “In terms of all of the losses in the financial sector, it’s not clear who to sue, and it’s not clear where the money is. Secondly, general corporate litigation is expensive and uncertain. It’s protracted, and, most of all, it’s nasty.”
Smaller Firms Emphasize Business
Small law firms are hoping that their flair for budgeting will sustain
them through the recession. After all, carefully tracking the bottom
line is what they do every year with narrow margins, not just in the
times when the economy demands it. They also are more inclined to maintain
a close degree of personal intimacy with their clients, and are typically
viewed as more than fair-weather friends. That’s why many legal
management consultants believe small law firms, if effectively managed,
will come through the recession far more easily than their larger counterparts.
“Anybody who listens to the news has got to be frightened,” says Michele Zavos, principal at the Michele Zavos Law Group, PLLC. “You have to keep doing what you know needs to be done. We’re looking very carefully at our bottom line. We don’t want to lay anybody off. There are other ways to address this issue. The way to do it is to be business smart and treat your firm as a business. I don’t think that lawyers tend to be very good at doing that.”
Zavos says she has made some practical decisions about managing the firm’s expenses, asking herself some key questions about services and products. Do they need to have every single publication? Are they getting the best price on malpractice insurance? The firm has stopped using certain services that were nice to have in a good economy but not crucial now, such as costly online research services. Zavos says the firm uses FindLaw, a provider of online legal information and Internet marketing solutions, and gets much of the same quality of information, but for free.
“You look at every expenditure,” Zavos says. “And at the same time, you market, market, market. You need to treat your long-standing clients well, but you also need to network. For us, the old saying about small law firms being six weeks away from bankruptcy isn’t necessarily true. You have to have people coming in the door every day, but if it doesn’t happen, you can’t get scared. I’ve been in business long enough not to be terrified. You keep yourself out there. You trust in your good work, and the clients will come.”
For Lerch, Early & Brewer, Chartered, a law firm based in Bethesda, Maryland, with about 120 employees, the impetus to reorganize for cost and efficiency didn’t come just six months ago but, rather, 15 years ago, after the firm was forced to make some sobering choices during the downturn of the early 1990s. “At the time, the remaining partners kind of codified what they wanted to have as the culture of the firm going forward, which was a very, very conservative culture of slow growth,” says David Anderson, the firm’s chief operating officer. “We decided that we wouldn’t grow for growth’s sake. We looked to strategically grow our practice areas where we saw a future. We looked at succession planning for older attorneys and how to bring on younger attorneys in a logical way. No particular area is dominant per se. We flow with the economy.”
And that includes this unpredictable economy. Anderson says the firm’s partners gathered at the end of 2008 and identified about 5 percent of its expenses that could be trimmed, if it proved necessary. In the first months of 2009, the firm has had a pretty steady workload, although there are the expected exceptions—real estate and lending, two areas that have done very well for the firm in the past five years. “I don’t see us making any real, significant changes,” Anderson says. “We’re certainly not looking at layoffs at this point. We’re hunkering down and trying to get closer to our clients. Strategically, it’s very important for us to understand their business and for us to be able to relate to them.”
Making A Firm’s Case
Many law firms are reemphasizing the importance of connecting with clients
and sustaining the relationship for the long term. Since small firm
leaders frequently know their clients more personally (rarely handing
them off to associates), they have become experts at the care and feeding
of clients.
“I think of myself as a retailer,” says Glen Ackerman, principal at Ackerman Legal PLLC. “We’re in the service industry. We have to deliver a quality service at a fair price that people can afford. Everyone that we meet on the street every day in the Metro, walking to work, or sitting at lunch is a potential client. This is a job, but it’s not a job that ends at 5 o’clock. It’s a job that ends at midnight.”
Ackerman says that by focusing on client services, he believes his law firm can build stronger relationships. He says his staff will meet with clients in the evenings and on weekends to accommodate their schedules. “They’re individuals and not corporations,” he says. “The individual has a limited amount of time during the day, and we have to value that time.”
That’s why Ackerman has instituted a rule about client correspondence in his office: read e-mails in the morning and respond to them in the afternoon. Ackerman says he tells his clients not to expect a two-sentence reply to questions. They are paying for time, so each question should be treated with respect. There’s no rush to push the Send button, he says.
“We are painfully aware of billable hours, but we are also aware of the fact that the person sitting in front of us or talking with us on the telephone is the most important person in that moment,” Ackerman says. “We want the client to feel that way every time he or she comes into contact with us.”
Extending the range of client services isn’t just a small firm idea. Both midsize and large firms are striving to distinguish themselves not only through their client service, but also through their appreciation for client dollars. “I look at what the profits per partner and shareholder are in some of the megafirms, and I’m often shocked,” Lerch, Early & Brewer’s Anderson says. “That’s not our culture here. Our attorneys, our partners, want to make a healthy living, but they don’t insist on making extraordinary salaries. I think clients will be making smart decisions about how they want to spend their dollars for legal services, and one of the things they won’t want to pay for is massive salaries.”
For the city’s largest firms, maintaining close contact with clients, taking the pulse of client needs, and focusing on their goals and ambitions are the essential keys to keeping clients from straying to other firms. Obviously, the cachet of a large law firm with its impressive roster of legal stars will always be a draw, but the challenge may be how to sustain that relationship when other firms are offering extremely competitive billing rates. In this economy, Manch says, “it’s not a beauty contest.”
Taking the Long View
Law firms that come through the recession may be the ones that are able
to best balance their short-term needs with their long-term goals, observers
say. Law firm management must look at the future, determine a strategic
direction, and then work toward objectives, regardless of the daily
fluctuations in the economy.
In fact, law firms would be wise to see the downturn as an opportunity to enact changes in structure and the way they do business, suggests the 2009 Client Advisory from Hildebrandt International and Citi Private Bank. “The current downturn offers an opportunity to rethink some of the basic assumptions about how law firms should be structured and how they should deliver their services. In our view, firms that remain strategically focused and that are not afraid ‘to think outside the box’ in terms of how they do their business may well emerge from the current crisis stronger and better positioned to compete in the future than before this crisis began.”
Following this thinking, fundamental changes could occur in some key areas often viewed as prime candidates for reevaluation and reform. First and foremost, law firm leaders should strategize for the time when the economy rebounds, not the next six months. With a plan in hand, the imperative then is to follow it.
One strategic element might be an overhaul of the associate hiring and compensation structures. Experts recommend that law firms reexamine these to ensure they reflect the realities of the current economy and the changes in society and in hiring. There are no assurances that the massive layoffs of associates could have been avoided with a tighter, more targeted associate system, but firms could draw for themselves a clearer connection between staffing needs and hiring. “Law firms are hiring this summer for two years from now,” Manch says. “They’re going to be recruiting for their summer programs, and those associates will come the following summer of 2010 for internships, and they won’t graduate until the spring of 2011.
“There’s no relationship typically between the class that’s coming in and your current needs. It’s serendipity if it fits. Who can forecast two years out with any reliability with the market as it has been the last 10 years?”
The Hildebrandt advisory also recommends a review of the firm’s professional staff structure and then making it more flexible to accommodate nonequity partners, counsel, and contract lawyers. Traditional structures may not fit the needs of firms or clients in today’s marketplace where cost may be a more important factor than name recognition.
Lastly, firms could reconsider the relationship between productivity and rates. The economic collapse might force significant revisions in law firm hourly rates, prompting clients to expect law firms to maintain those changes once the recession subsides. The escalation of rates in recent years, while boosting profits, has continued unchecked, with little second-guessing about its efficacy. A review of those policies going forward, experts say, might address client concerns about the economics of law firms.
Ultimately, law firm leaders say there’s no way of knowing what the future holds, and that any efforts they make today to woo clients, reduce costs, or renovate their staff structures could all be for naught. Even efforts to open new practice areas to address countercyclical opportunities are no guarantee of success. “Part of the problem is, there’s no clarity,” MacEwen says. “There’s no visibility about what sectors of the economy are going to be particularly busy for law firms going forward, so nobody knows where to focus their resources. It’s hard to plan for the future until you know where you’re going.”
Still, many believe that law firm leaders might find some of the answers about the future by looking internally, not just externally. The troubles plaguing the economy—and to some degree, the legal profession—are problems that resulted from too little foresight and discussion, not from too much. If law firms expect not just to survive but to flourish through this downturn, they will have to be forward-thinking with an appreciation for the best of the past. “What works best now has always worked. Take care of your clients. Work productively and smartly. Operate within your budget. They’re pretty basic principles,” Manch says, “and they work.”
Freelance writer Sarah Kellogg recently wrote “Charting A New Course,” about the Obama administration, which appeared in the March issue of Washington Lawyer.
Notes
[1] Unemployment figures available at www.bls.gov.
[2] www.adamsmithesq.com.
[3] American Lawyer list
of layoffs.
[4] Layoff Tracker published cooperatively by Above the Law and LawShucks
legal blogs available at http://lawshucks.com/layoff-tracker/.
[5] January 2009 Client Advisory of Hildebrandt International
and Citi Private Bank available at www.hildebrandt.com.
[6] The
National Law Journal available at
[7] American Recovery and Reinvestment Act of 2009 available at www.recovery.gov.
