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Attorney layoffs have become industry standard in recent months, with at least 50 of the nation's top law firms ushering practitioners out their doors and into a torpid job market.
Law firms cite a declining demand for legal services, decreased fees for the work that's left and a lack of usual attrition as reasons for cutting attorneys loose.
But just how much do law firms stand to save by slashing ranks? A lot, as it turns out, considering the options.
Law firm leaders and industry consultants say a firm cuts costs by an average of $250,000 for each attorney let go. For each legal assistant or other staffer laid off, a law firm saves about $100,000.
And because they don't have much room elsewhere to shave expenses, it is little wonder that the head count of the departed is rising.
For most big law firms, about 85 percent of their budget goes to rent and personnel costs, say firm leaders, which means that the money saved by scaling back on copies, car services, partner retreats and marketing comes from a small percentage of their revenue.
"There's only so much you can save by pulling the tea and cookies out of the conference room," said the chairman of a major U.S. law firm that has laid off attorneys during the economic downturn. In order to speak candidly about his firm's finances, he requested anonymity for this story. "The rent you're stuck with, so you're left with this huge megillah of compensation," he said.
REPLICATING ATTRITION
Because associates are clinging to their positions as the economy declines, law firms are finding it necessary to replicate the attrition they've come to expect, he explained. "We have an entire machine built around 25 percent attrition," the firm chairman said. "We have to engineer that just to stand still. The only comfort one can find in this is that you get the attrition you want."
But it is cheaper to have attorneys leave on their own accord than to lay them off. Severance packages that firms are giving to pink-slipped lawyers vary, but the firm chairman said that, in general, every $10 million saved in compensation is offset by $7 million paid in severance.
He said it is difficult to let any attorney go, but terminating new lawyers is the most emotional. "Somehow, it feels worse when they don't have any performance [to consider]," he said.
The need to hold onto cash is the big driver behind the layoffs, and getting rid of associates can increase liquidity. But the decisions by law firm leaders to drop associates also serve another purpose, said Friedrich Blase, an executive partner with KermaPartners, a consultancy.
"They also do it to show partners that they are in control of the situation, that the partnership is doing the right thing," he said.
Partners working at firms that have tried to increase cash availability by deferring partner profit distributions, reducing partner draws, making cash calls to equity partners or asking nonequity partners to provide capital also want to see that the firm is making sacrifices at lower levels, Blase said.
However, cuts on the bottom rungs may not be the smartest move, he said. He gives the example of a law firm with $100 million in revenue, with 30 percent of that amount going to associate salaries. Layoffs that trim 5 percent of associate costs are the equivalent of just 1.5 percent of revenue.
"If you think about saving money, culling associates is really not the big game. It's the easy game," he said. Blase added that, under his scenario, a mere 3 percent savings requires a firm to lay off 10 percent of its associates.
The tougher choice is to make cuts at the nonequity and senior counsel levels, he said. Not only are those attorneys typically very expensive for law firms during slow times, but some of those lawyers, out of desperation, hoard work from the attorneys below them, he said.
Intense pricing pressure from clients has forced a chairman at another top U.S. law firm to make some difficult decisions, he said. He also requested anonymity to speak openly.
"There's less diplomacy in the discussion [with clients] about discounts," he said. "They're not inviting you to a discussion. They're saying 'it's 10 or 15 percent, and if you can't help us out, maybe we'll go somewhere else.' "
Although his firm hasn't implemented attorney layoffs -- at least not yet -- it has cut legal staff. "What we're going to try to do is reduce secretarial-to-lawyer ratios," he said. "We haven't gone as far as we think we can go."
In addition, the law firm has scaled way back on lawyer travel and is asking attorneys to connect with clients through teleconferencing, he said. Reducing face-to-face contact has its price, he said, and the firm "is not sure how big of a price that is."
The real cost savings of any attorney layoffs, he said, take about nine months to see. "The question is: When do we get to the point that we decide we're ready to do that?," he said, adding, "Mission No. 1 is to preserve the partnership."
In addition to freezing salaries, the law firm canceled a planned partner retreat. Such events, said the chairman, are "highly visible" to clients and nonpartner attorneys. He said that "symbolically, it's a good thing" to call off the event, given the circumstances. The law firm also had planned a complete overhaul of its Web site, which it has postponed. "We're looking in every corner of the firm," he said.
NOT DIGGING DEEP ENOUGH
But many law firms aren't digging deep enough to find where they can reduce expenses, said Bennett Gross, president of Callydus Group, a New York-based company that helps law firms increase efficiency. The drop in business, he said, is forcing law firms to implement efficiencies they should have initiated years ago.
"Suddenly, law firms that were resistant to change are open to whatever can be done," he said.
His company scrutinizes expenses such as publication subscriptions, black car services, document management, human resource searches and temporary labor, to find out where to cut the fat. Minor changes add up, he said. For example, one law firm had hired a mail service that was performing pickups at its offices five times a day. Another client was outsourcing all of its printing and copying, at above-market prices. Because law firms have grown accustomed to passing on their costs to clients, they have been lax in getting the best deals, Gross said.
