Grim report advises law firms to prepare for a long, painful slide
Karen Sloan / Staff reporterThe National Law Journal
October 24, 2008
Brace yourselves, because the legal industry is in for a long and painful slide.
That's the gist of the latest client advisory from Hildebrandt International, which director James Jones called "the grimmest one I've ever written."
The advisory released this week predicts that average law firm profits per partner will be flat in 2008, and could decrease by 15% or more at certain firms. Those predictions are a departure from the consulting group's advisory issued in the beginning of 2008, which projected that firms would see slight growth in profits per partner this year.
"By mid-year, even that was a looking a little rosy, so we dropped the projection," Jones said. "It's just not pretty out there at the moment."
Of course, news that law firms have hit hard times would surprise few in the profession at this point, but Hildebrandt's advisory is notable for the sheer extent of doom and gloom that it portends.
Among its bleakest findings:
• The economy is unlikely to see a significant turnaround until late 2009 at the earliest.
• Firms will continue to resort to layoffs, hiring slowdowns and eliminations of unprofitable practice areas.
• With fewer clients overall in the financial and capital markets sector, firms will face "more vigorous competition" for that type of work.
• Firms will not be able to count on 6% to 8% across-the-board billing rate increases in 2009 to boost profitability.
" We see 2009 being a tough year," Jones said.
Law firms saw productivity drop partway through 2007, but the latest financial mess has only served to compound and prolong the problems that began with onset of the sub-prime mortgage crisis, Jones said.
Hildebrandt's advisory includes a number of suggestions for how managers can help their firms weather the current storm.
For one thing, all necessary layoffs should be made at one time and in 2008, which will give law firms a stronger start in 2009. Firms should also trim unprofitable practices and underperforming attorneys, according to the advisory.
Law firm expenses have risen dramatically in recent years, and the advisory suggests firms trim costs where possible while avoiding a "slash and burn" approach. Jones said most firms are already looking for ways to cut costs, meaning attorneys could find themselves sipping Yellow Tail Shiraz at the firm holiday party this year instead of the appropriately aged Burgundy they are accustomed to.
Firms should also maintain frequent communication with attorneys and clients, who are likely to be anxious, given the instability of the economy and the uncertainty of the future.
Despite all the bad news, Jones pointed out a few positive developments. Firms are beginning to see an uptick in traditionally countercyclical practice areas such bankruptcy, litigation and regulatory work. That should help make up for some of the losses in real estate, capital markets and finance work.
Also, demand for legal services will bounce back in time.
"The legal industry tends to come out of an economic downturn faster that other industries," Jones said. "Once deals get going again, you need attorneys to work on them."