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Stephen Neal, the chairman and CEO of Cooley Godward, has a big problem, and his options aren’t pretty. His Palo Alto, Calif.-based firm has too many lawyers and not enough work to keep them busy. The firm has already cut costs and could slash bonuses or offer unpaid sabbaticals, as other firms have done. But that’s not going to give work to the associates who need it to grow professionally, Neal said. “It’s not a healthy situation for the firm or the individuals involved,” Neal said. What Cooley plans to do is uncertain at this point. Neal said the firm is mulling its options, which range from more cost-cutting to outright layoffs. “The Valley is never coming back to the same way it was,” said a Cooley first-year associate who spoke on condition of anonymity. “That’s going to mean a lot of cost-cutting and a lot of layoffs, and I think it’s going to get worse before it gets better.” Since the economy ground to a halt last fall, law firms have done all kinds of things to avoid layoffs. But cutting expenses, like travel and retreats, slashing bonuses and offering sabbaticals amount to a drop in the bucket of most firms’ budgets. The key question for tech firm managers is now: How low do profits have to sink before partners start clamoring for something more drastic — like a layoff? Firms don’t have a number circled on a balance sheet somewhere that tells partners it’s condition red. Instead, say partners at tech firms, it’s a matter of how much pain they can endure and for how long. “I’m sure there will be a point where we’ll all scream,” said one partner at San Francisco-based Brobeck, Phleger & Harrison who spoke on condition of anonymity. Brobeck partners, for the most part, are willing to pay the cost of carrying idled associates for now, he said. “We’re going to go a little further out than you’d go if you were a hard-headed business manager.” It could be only a matter of time before firms have to start making deeper cuts. Consultants say bloated tech firms may not escape layoffs this year and that no one, not even partners, should be spared scrutiny. “Law firms, after they’ve had a prolonged slowdown in a major practice area, will start to determine when to fish or cut bait,” said Pete Peterson, a consultant at Hildebrandt International Inc., which advises law firm managers. “What they’ll most likely want to do is look at associates,” Peterson added, “but what they should do is look at partners.” A layoff at any level is toxic for firms who want to avoid ending up like Latham & Watkins. The firm laid off 34 associates in 1991 and — fair or not — after 10 years, the decision is still seen by some as a black mark against the firm. “It ought to be more than a year of disappointing firm performance before you start looking [at a layoff],” said the managing partner of one large San Francisco firm. And as for cutting partners, he said, “It’s another wrenching choice and one you don’t make six months into a recession.” The firms with the largest corporate practices have been the hardest hit by the weak stock market and drop-off in venture capital financings. The three most active firms in the securities area, Brobeck, Wilson Sonsini Goodrich & Rosati and Cooley, bulked up to handle 373 initial public offerings in 1999 and 2000. But in the first six months of this year, the three firms did eight IPOs among them, leaving a lot of associates with nothing to do. Earlier this year, firms started trimming their ranks by giving tougher performance reviews, but that’s affected a relatively small number of lawyers. Brobeck, Cooley and Wilson, combined, employ more than 2,000 attorneys — and the performance-based terminations have cut no more than a hundred lawyers among the firms. To avoid going too deep into their ranks of associates, firms have been cutting costs or dreaming up new programs to avoid paying people. Most Silicon Valley firms, for example, have pushed back the arrival of their first-years. Wilson canceled its retreats and stopped serving free dinners. Last week, it warned its associates not to expect much by way of a bonus this year. Venture Law Group, based in Menlo Park, Calif., offered a stipend to its associates who wanted to take a public service job for a year. VLG also cut some associates with tougher performance reviews and demoted a handful of associates to helping build the firm’s database. And Brobeck created an unpaid sabbatical program for associates. Brobeck Chairman Tower Snow Jr. has been the most outspoken manager among the tech firms when it comes to layoffs. Snow has been emphatic that the firm will not lay off associates. So far, most of the firm’s partners side with him. But if the downturn lasts deep into next year — much longer than many of his supporters predicted — then partners will start changing their minds, said one San Francisco Brobeck partner. “There are forces that are more powerful than even Tower — like the U.S. economy,” the partner said. Except for trimming expenses, Cooley hasn’t yet announced any drastic cost-cutting measures. And for his part, Neal isn’t so sure that what other firms are doing will help his firm’s associates, who are competing among themselves just to stay busy. “Some of the actions you’ve seen at other firms may be good or bad, but they don’t fundamentally address the situation,” Neal said. “They don’t deal with the fact that the firms have more lawyers than they can fully engage.” In the past five years, Cooley has swelled its ranks of lawyers by 139 percent to 650 lawyers. Tech work was booming and revenues swelled likewise to $320 million in 2000 from $114.5 million in 1996. And the firm is coming off a good year, with $905,000 in profits per partner. The firm has averaged historically 160 hours per month per biller, including associates and partners. That average this year has fallen by as much as 30 percent, Neal said. Yet, Neal insists: “It isn’t a near-term numbers issues. We’ll have a good year, so the concerns about keeping people occupied and trained and developing are the bigger concerns.” He added: “There comes a point in time when we’re not doing anybody a favor in sort of accepting a long down period.” Cooley managers are “examining the situation and will continue to examine the situation,” Neal said. “We are actively considering what, if anything, we ought to be doing and when and how,” Neal said, adding, “there are a range of options.” Don Oppenheim, a principal at Altman Weil Inc., a law firm consultant, has a checklist of questions firm managers should ask themselves before deciding whether to cut staff. They’re as simple as the quizzes in Cosmopolitan magazine, but firm managers may find they hit uncomfortably close to home: Do your associates complain they’re light and don’t have enough to do while the partners keep work to themselves to stay busy? Are paralegals complaining they don’t have enough work as well? Are clients complaining about paying partner rates? Are clients clamoring for reductions in their bills? “What you don’t want is your core partner to come forward and say, ‘We have too many lawyers here,’ ” Oppenheim said. And firms shouldn’t stop at associates when they look at cutting people, Oppenheim added. Firing partners is a big option that firms ought to consider but rarely do, he said. “One of the big mistakes law firms make is they view the layoffs as happening at the associate level, and, really, there should be a focus on all lawyers,” Oppenheim said. “Associates in a fully utilized firm, per unit, make more money for the firm than partners do,” he contends. But as Hildebrandt’s Peterson put it: “That’s the most difficult thing for firms to do because they’re family.”

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