The Fire This Time: Thoughts on The Coming Law Firm Hiring Crisis

Aric Press

02-12-2009

If present trends continue in the big firm market, we are heading toward--you pick the cliché--a paradigm-shifting, blood-in-the-suites, terror-on-the-campus hiring and retention crisis. The "economic reset" that General Electric's Jeffrey Immelt has tagged seems likely to force changes in the way firms recruit, pay, and/or retain their lawyers. The market for labor has changed and, for now at least, there's no normal to which it can return.

Law firms are actively considering the prospect of pay cuts, delayed starting dates, sharply reduced offers, and more lay-offs. The carnage of Black Thursday will likely continue. This is an ugly situation made worse by the peculiar hiring schemes that were tolerable during good times but now are under serious stress. Not every firm has swung the scythe and some never will. It’s notable though that with so many firms pushing out so many people, there is little of the usual talk about how firms are endangering their cultures. For the moment they are more concerned about managing their businesses.

If nothing changes, this fall the same law firms that recently laid off lawyers will start welcoming large groups of new lawyers, whom they will pay too well and for whom they will have too little work. If the layoffs were about saving money in a downturn, the new hires will overwhelm any savings and will signal that the firms regard the economic crisis as little more than a mild detour on the golden brick road.

I wish it were otherwise. But consider the current Conventional Wisdom: at law firms work (and profits) are down, attrition is far below average, law school graduates hired in an optimistic time are about to join firms awash in anxiety, and the conveyor belt that will bring still more eager and talented young lawyers aboard is about to start up again.

This does not seem to be a sustainable situation. If it's not it will, at a minimum, force law firms to make a harsh choice between the lawyers they already have on staff and the ones they're about to welcome.

This is what we think we know:

Dan DiPietro, the Citigroup law firm banker, and Brad Hildebrandt, the consultant, tell us that demand for legal services is flat or down. Download their Report to Clients here. They are correct, though the real pain in the market is disguised by their modest sample and reliance on averages. In fact, some firms, or at least some practice groups within firms, are churning out work at a very healthy pace, which leaves those below the median in far more serious straits than their grim report suggests.

Leigh Jones in The National Law Journal, helpfully reports that part of the reason for law firm layoffs is to "replicate [normal] attrition," which one chairman she quotes puts at roughly 25 percent annually. Leaving aside the hat tip to Star Trek, she's right, at least as far as she and the firms go. The problem is that they may have to go much further. Her unnamed chairman explains that his whole "machine" is built around a quarter of his associates leaving each year. But in a climate when virtually no one is leaving voluntarily, laying off a few dozen lawyers won't keep his "machine" from choking on its unproductive parts. At some firms there are too many lawyers and too little work.

Our daily reports on big firm financials show that while top-line growth continued in 2008, profits per partner and revenue per lawyer tended to drop. (See The Am Law 100-A Work in Progress.) The situation is not yet dire. Partners continue to earn handsome rewards--less than last year, more like 2004-05. Many know how well they have it and haven't started grousing. Some are exploring their lateral options; other are scrounging for business; and a few are eyeing their non-equity partners and their associates much as Clint Eastwood glares at his family and new neighbors in the opening scenes of Gran Torino.

The calendar tells us that we are just 200 days from the post-Labor Day arrival of large classes of new associates who, in curious law firm fashion, were hired in the autumn of 2007, during their third semester of law school. To put it more colorfully, these promising young students were offered summer associate jobs at a time when trees were growing to the skies, infallible economic statesman led Lehman, AIG, and Bear Stearns, and--this is the rub--summer associates, who didn't get ridiculously drunk at a partner's barbecue and scavenger hunt, were guaranteed jobs starting on or about September 10, 2009. That sputtering sound you hear is Leigh Jones's chairman's "machine" gagging on his new hires.

The calendar also tells us that we are about 180 days from the start of summer on-campus recruiting when law firms, who can't fairly predict what the third quarter of 2009 holds for them, will begin filling up their incoming classes for the fall of 2011. Even in tradition-bound law firm land, this seems a bit much. Instead of vigorously debating whether to offer a firm-embossed flash drive or a PETA-approved monogrammed fleece as an interview take-away, the hiring committees and firm leadership are starting to ask whether they can change the way they do business.

We know a few other things, too.

Absent the economic calamity, most associates don't want to stay at their firms forever, and firms don't want most of them to stay either. The quarrel is over who decides when they leave.

The second and third year associates now getting laid off were themselves recruited barely four years ago. They had sterling resumes, passed the correct-fork test at lunch, and have more or less held up their side of the law firm bargain.

Once they're on board, first-year associates get little or no respect. Clients don't want to pay for their training. Firms bemoan their costs. It's as though they were human toggle switches: the best and the brightest of their graduating classes only twelve months earlier suddenly rendered into dross and objects of regret once they have moved in.

So, if you put all this together you have a system that doesn't fit the times, a system that would have firms lay-off lawyers with one hand while scooping up new and presumably less valuable ones with the other. This doesn't make much sense. Who will get hurt the most in this situation: The partners without business, the associates without work, the 2Ls and 3Ls without experience? No one--okay, almost no one--wants to make these choices. But that's what the times demand.

Here's what to look for in the labor market reset:

Lower Starting Salaries

Firms are concluding that they are paying too much to their first years. Many, if not all, are still struggling with the last round of across-the-board salary increases given to associates two years ago. Bumping starting salaries up to $160,000 in major money centers arguably made sense when profits were booming and firms feared that they were losing their best talent to the hedge funds of Greenwich. Those days are over and yet the 160K bogie remains as inviolate as though it were handed down at Sinai. If the market--and not weird lemming-style management--drove the salaries up, then presumably the market should drive them down. How far? Back to $130,000, where they lodged at the peak of the tech boom? Back to $100,000, which one managing partner refers to as a "life-boat offer"--if you take it, we guarantee not to throw you over the side for several years? Not every firm will choose to cut starting salaries. Some can afford them, for others it will be a matter of pride. And a clever few will break with the past and pay some of their new recruits more than others. But we’ve never done that! Correct, and you’ve never laid off 80 lawyers in a day either.

Wage Cuts

Several firms have announced wage freezes: no automatic raises for serving another year. This is not particularly novel among clients but it has caused a stir in law firms. It saves some money, but law firm managers admit perhaps not as much as they will need to weather the downtown. When starting salaries bumped up, the rest of the pay scale improved also. If starting salaries get cut, will the rest of the pyramid take a hit too? There are three reasons why it should.

First, an across the board pay cut could save a lot of lawyers jobs. (Before the blogosphere erupts, I understand it's not your fault, I understand that the partners should be out winning business, I understand that you're the victims. So are the Merrill Lynch lawyers cut loose by Bank of America after their principals ran their firm aground. These are bad times and now we have to figure out how to manage them.)

Do the math: in a firm with 500 non-equity partners and associates, a $40,000 pay cut will save almost twice what laying off 50 associates already has. But, you say, some of these lawyers are stars and they must be rewarded! True enough, which brings us to the second reason to go this route: Law firms have too long been wedded to paying their associates in a lock-step fashion. As Citi's DiPietro argued in the August issue of The American Lawyer, it's time to break that routine at most firms, and recognize and reward achievement.

Third, by scaling back the pay packages, law firms will be able to pull back their billing rates and allow second and third years to do whatever work may be available without incurring the wrath of hard-pressed clients.

I take as a given that equity partners will share in this pain. If business wasn't off, profits would still be rising and no one would have read this far. But the owners of the firms are taking a hit, though probably less in percentage terms, than I've laid out for the associates. It turns out that the owners have more say than the rest of us.

Delayed and staggered starts.

Like snow geese that cross the 44th parallel every fall, new associates enter law firms each September as though they were obeying a biological imperative. If there is little or no work waiting for them this fall, that seems a might pointless. Instead, look for firms to behave as their clients do, delaying starts of new employees until there is some demand for their services. And look for them to behave unlike their clients-offering stipends for extended vacations, pro bono service and advanced course work, anything to build loyalty-and keep them out of the office.

Sharply reduced summer classes.

I doubt that any of the major firms will stop recruiting first year associates. However I expect that given the glut of junior associates, that they will reduce the number of new ones they bring on for this summer. It's just your mother's rule applied to hiring: don't put more on your plate than you need. A class of ten, say, handpicked from Stanford, NYU, Harvard, Georgetown, UCLA, Emory, Northwestern, Columbia, Michigan and Fordham, is likely to maintain the partners self-esteem without jeopardizing the firm's economics in September 2011. Also, it will allow the firms to continue managing to the metrics established by the National Association of Law Placement (NALP): evidently it takes a very brave firm to fall below the 90 percent permanent offer mark for summer associates. They believe that if they dare to cross that barrier they never will be able to hire again. Old beliefs, evidently, die hard. And, finally, it will gently move firms toward the revolutionary idea of hiring new associates out of graduating classes when they might actually know how many they need. Might this leave firms short of labor when and if the surging financial markets return? Maybe. But that's what lateral hiring is for.

More layoffs.

Next time it will be partners. I posted a grim assessment in January and it hasn't changed. I suspect little will happen until autumn. While most firms long ago got over the horror of de-equitizing or outplacing equity partners, those moves tended to come in ones and twos. If the economic plight continues, lopping off one or two overpriced income partners just won't move the needle. Instead, we'll watch a three-step process. First, partner meetings will be filled with phrases like "pilot fish" and other not-so-gentle put-downs. Then, business-generating partners will begin demanding action even while they plan their own exits. Finally, if it gets bad enough, those without equity will find themselves without jobs.

I hope I'm wrong, and that over the next few months the stimulus package will kick in and the global economy will recover. It also would be nice to think that even if it doesn't, law firm partners will exhibit saintly patience and keep paying their associates and partners-without-business as though nothing were amiss. But it doesn’t seem likely. More lawyers and staffers will suffer. Someone will create a Law Firm Misery Index. And maybe the crisis will encourage some candid conversation about past practices and the shedding of habits that no longer make much sense.

E-mail: aric.press@incisivemedia.com