Calif. Firms Risk Losing Out on Revenue and Client Relationships Amid the Talent Shortage

Competition for corporate associates in the Bay Area is putting strain on law firms like never before, causing some to suffer financial consequences and producing a widening gap between the most profitable firms and the rest of the pack.

“There is an associate war all over, but nowhere like here,” said Suzanne Kane, a partner at Macrae. “It’s an absolute crisis.”

More and more, San Francisco-based partners are expressing frustrations that there isn’t enough support, or enough stable support, for the historic-levels of workload that continue to come the way of law firms.

“Firms that have lost associates are desperate. It’s affecting their year to the tune of tens of millions of dollars,” Kane said.

She recalled one conversation with a partner, who estimated they’ve lost 15% to 20% of the revenue they could’ve generated this year because their firm can’t retain associates.

And the problem is twofold: “We have a number of law firm clients struggling with staffing issues, given ongoing deal activity and the relative dearth of available talent,” said Kristin Stark, a principal at Fairfax Associates.

“In order to preserve client relationships and client loyalty, many firms are continuing to take on new work in spite of the strain on available timekeepers,” Stark said.

Stark continued, “Others are having to turn down opportunities because they are already so overloaded. For these firms, this is clearly a disappointment, as they are losing both the revenue they would have had from the work, but also risking the client relationship since other firms will be retained and will now have a bigger foot in the door with the client.”

Some recruiters and legal observers noted it’s difficult to quantify the exact financial impact on firms at present, as many firms are thinking about a hypothetical, potential revenue they would have had if they had more resources.

But the fact remains that top transactional firms in the Bay Area “are having record years again, and the amount of revenue they generate is only limited by their capacity to staff deals,” said Bob Brigham, a recruiter at Major, Lindsey & Africa.

That means middle market firms, or firms that handle smaller cap deals, are being squeezed for resources and struggling to keep up.

Widening the Search

It’s no secret the Bay Area presents heightened challenges to law firms. The market is heavily saturated. Yet, firms continue to flock to the region to put boots on the ground and cross-sell an existing client base to incoming partners.

As firms look to fill out their ranks with associates, they face competition from global technology companies with in-house opportunities. The housing market is increasingly expensive, and a growing number of lawyers no longer want the hardship that some in past generations have attributed to paying their dues.

“I think we’ve seen a fallout, with the generational shift,” Kane said. “The attitudes of millennials and Gen Z lawyers are different. They don’t want the struggle.”

Still, other analysts believe it’s not simply a problem of lawyers looking to other markets or in-house roles instead of roles within law firms in San Francisco.

Some recruiters noted the mass exodus from California that some had forecasted hasn’t come to pass. While some tech workers left the region, lawyers stuck around. In fact, the percentage of lawyers relocating into the market in the last year was up 150%, according to Kate Reder Sheikh, a managing director at Major, Lindsey & Africa who specializes in associate placements.

“I’m not totally sure how smaller firms will make adjustments because there just aren’t enough bodies, and the bodies that exist are able to go to Am Law 10 firms,” Reder Sheikh said.

While firms are sweetening their offers with six-figure signing bonuses for mid- to senior-level associates and agreeing to more flexibility than ever, some firms are coming to the realization that those efforts aren’t enough.

The most successful firms are employing creative tactics and making efforts to take a humanistic approach to talent acquisition, according to recruiters. Many are prepared to answer specific, incisive questions from associates about the average hours billed in a practice, the client development plan, and whether or not the group is turning away work, Sheikh said.

And some firms are looking at bringing in talent from other markets.

“I’ve placed more Canadians and Australians at Bay Area firms this year than the rest of my career,” Sheikh said.

These foreign-educated lawyers bring strong in-house experience and have fairly automatic access to visas. As a result, Bay Area recruiters are cleaning out corporate departments in places like Montreal and Vancouver, she said.

And as questions about associate support come up more often and earlier in the interview process, recruiters are helping partners have a plan in place once they depart a firm.

“All partners know—and want to make sure—they don’t solicit an associate,” Kane said. “But you can tell an associate you’re leaving. That is one of the most important things that some partners don’t do: make sure they hear it from you. Don’t underestimate how that emotionally affects the associate.”