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Will the Future for Law Firms Be a Reset Button Rather Than a Panic Button?
The Legal Intelligencer
June 22, 2009
Editor's note: This is the final installment of a weekly series examining the lasting effects of the recession on the legal industry.
There's not a crystal ball in town that isn't predicting dramatic shifts in the legal industry. But there is no one-size-fits-all model for adapting to those changes. At least that's the hope.
Maybe, just maybe, the days of follow-the-leader are gone. There is no bandwagon to jump on like there was when salary wars were being waged and the stigma attached to making tough, unique -- and sometimes unfavorable -- decisions seems to be fading as firms use the recession as cause to hit the reset button.
"The single best thing that can come out of all of this, and I think it's starting to happen, is that maybe, finally we can get to the point where each individual firm focuses on what's best for their law firm as opposed to trying to emulate their star firms," Hildebrandt's Joseph Altonji said. "We all have the same set of issues, but we don't all have to have the same answers."
This shift in attitude does increase the risk for firm leadership, he said, but the right question no longer inquires what other firms are doing. Firm management has to have the ability and the interest to take on that risk and examine the firm's own circumstances in making decisions, he said.
And there are plenty of topics to tackle.
FIRST-YEARS, STAFFING AND LEVERAGE
It seems the current market has thrown the highly leveraged model out the door for the foreseeable future -- maybe even permanently.
Firms are moving from the pyramid model of a few partners at the top and hordes of associates at the bottom to a diamond shape in which several senior associates and junior partners make up the bulk in the middle in an effort to maximize value for the client.
"[E]ven for very robust firms that continue to have profitable work flowing in the door, there is a marked shortage of work for newly made lawyers," Drinker Biddle & Reath Chairman Alfred Putnam Jr. said in a letter to incoming first-year associates. "In addition, the days of large law firms assigning (and clients paying for) 'armies' of very junior lawyers to large-scale litigation or transactions are over -- likely never to return."
The firm recently told the associates their pay would be brought down to $105,000 for the first six months in order to focus on training rather than billing hours.
This shift in attitudes toward first-years means firms will start to bring in smaller class sizes and will look to bill a smaller proportion of associates' time, focusing instead on training, Altman Weil's Ward Bower said. So when large matters come up, firms will increasingly turn to outsourcing through contract attorneys and might even look to off-shoring work, he said.
COMPENSATION MODELS SHIFT
Law firms are moving away from lock-step toward merit-based pay for both associates and partners. And the criteria for making partnership are becoming much tougher.
"It literally makes no sense to run a business where your basic compensation, no matter how good you are, is the same," Ballard Spahr Andrews & Ingersoll Chairman Arthur Makadon said.
Large firms have begun to cut associate salaries and those that haven't are thinking about it. Altman Weil's Jim Cotterman said supply and demand will most likely dictate the movement of associate salaries.
Recruiter Jerome Kowalski of Kowalski & Associates said that with increased capital needs, changes in billing practices and an excess of attorneys, "these mega-numbers in terms of compensation are just going to disappear."
One of the big drivers of lawyer compensation was the need to compete with salaries of other professions, particularly investment banking. Today, salaries in those fields aren't on the rise, Kowalski said.
ALTERNATIVE BILLING
Am Law 200 firms on down are beginning to look beyond the billable hour as the lip service that has been paid to alternative fee arrangements for years starts to become reality in this buyers' market.
To be sure, even by accounts of alternative fee advocates, the billable hour is not dead and probably never will be. But a shift, slow as they go in the legal industry, is afoot in terms of how firms work to provide value for clients. And in this movement, the billable hour is seen as the antithesis of efficiency and value.
Dechert senior counsel William B. Lytton, a former GC for Fortune 100 companies, said for the most part firms don't offer and law departments don't ask when it comes to anything other than the billable hour. The larger firms will lead the way on this transition to alternative fees and it will be the ones that can get there first that will be best positioned in the market, he predicted.
But even people who embrace the concept of alternative billing methods are overwhelmed and cautious by the required shift in law firm structures, Association of Corporate Counsel General Counsel Susan Hackett said. "We're in that horrible middle stage," Hackett said. "As to whether or not it's inevitable, yes it is. For those who are saying the talk is because of the economy and that once things go back to normal we'll go back to billing as we used to -- wrong."
OPPORTUNITIES FOR SMALLER FIRMS
This climate is a "great opportunity for the so-called midsized firm to define itself for the long run, not just because it's an economic recession," Jeff Coburn, of Coburn Consulting in Boston, said.
According to many in the legal community, even some of the largest corporations are stepping out of their megafirm comfort zones and bringing significant matters to smaller regional firms.
"I think with in-house counsel being required to cut costs, some of them realize that there are some very high quality regional firms that can save them significant hourly dollars," said Maury B. Reiter of Kaplin Stewart Meloff Reiter & Stein in Blue Bell, Pa. "As opposed to being patronized at times [by large corporations], we're actually being looked at as a real potential competitor for the business they're handing out."
The percentage of legal spending Fortune 1000 or Fortune 2000 companies are currently devoting to big firms may drop in the future, with midsized firms seeing more of that money, McNees Wallace & Nurick Chairman David Kleppinger said.
But he said it's important for midsized firms to make sure they hold onto their existing clients, even as they reach for bigger, bolder work.
"There's no question that it is [a time of opportunity for midsized firms], but I think all of us have to recognize that for every midsized firm there's a somewhat smaller midsized firm that sees a similar opportunity [to obtain] work currently being done by firms like us," he said.
GENERAL COUNSEL AFFECTED TOO
Law departments certainly aren't immune to the systemic changes the economy has forced upon their law firm counterparts, but when outside counsel fees are a department's biggest cost, general counsel are expecting the biggest changes to come from the firms that serve them.
"I think we're on the cusp of change," Texas-based FMC Technologies General Counsel Jeffrey Carr said. "And if firms don't change, they're not going to like what results in the end because there are forces in play that are driving change and you can miss the train, you can get on the train or you can get hit by the train, but the train is moving."
Daniel J. DiLucchio Jr. of Altman Weil said every change in law departments is stemming from cost control, and many of the changes are fundamental and long-lasting.
"I personally think lawyers are notoriously bad in coming up with a realistic budget," SunGard Data Systems GC Victoria Silbey said. "I want them to have to put some of their reputation on the line with these budgets."
Some companies are also looking at bringing on outside counsel later in a matter rather than signing them up at the first hint of a deal or case, she said. With more work being done in-house and often fewer dollars to hire new lawyers for the department, Silbey said people are working really hard and often on matters unique to the economy and new to them.
"It has shown us, to some extent, that we really can do more internally than maybe we even imagined that we could," Silbey said, adding later, "Even as the economy turns around, it will be a while before those things fade away. I hope we can figure out how to inculcate them."
HOW THEY'LL HIRE, WHOM THEY'LL SERVE
Industry consultants and firm leaders alike anticipate law firms will primarily model themselves to suit their clients' geographic needs, rather than focusing on diversifying practices.
As the economy rebounds, they also expect hiring levels similar to those seen pre-recession, but firms will likely hire fewer partner-track associates as part of that push.
While many firms pointed to practice diversification as their saving grace through the financial sector collapse, most consultants and firm leaders said the largest of firms are already offering a pretty broad array of services, albeit for perhaps bigger clients or higher-end matters.
Why would a partner, even with a profitable, strong practice, stay in a firm with thousands of lawyers around the world -- and the infrastructure that entails -- when his practice is focused mainly in one geographic area, Altonji questioned.
"So I think what you're going to start to see is some of the bigger firms will optimize around broad swaths of work that need that infrastructure," he said. "Other firms will start to optimize around more local practices."
Firms still need to hire for the traditional associate track because they will be future leaders of the firm, recruiter Robert Nourian said, but there won't be as much of that hiring. Instead, firms will focus on staff lawyers with credentials maybe only half a step below the traditional associate level to help in a support capacity.
"There's chiefs and there's Indians," Nourian said. "Somewhere down the pyramid you can have some folks who maybe aren't Ivy League grads."
While firms are loosening their traditional standards at the associate level through hiring staff attorneys, they are becoming all the more critical of partner-track associates and partners. Nourian said the two phenomena aren't inconsistent. He said there could be more of an up-or-out philosophy when it comes to partners, with fewer associates being made partner.
