Will 2008 Be Law Firms’ Worst Year Since Early 1990s?

Law Practice Management

Will 2008 Be Law Firms’ Worst Year Since Early 1990s?

Posted Aug 20, 2008, 02:50 pm CST
By Martha Neil

Fasten your seat belts. A difficult economy has cut partner profits and associate attrition, while increasing expenses for major U.S. law firms, creating "a dramatically different economic environment from the previous seven years," an expert says.

Law firm revenue in the U.S. is growing at the slowest pace since at least 2001. And, because many firms are continuing to add lawyers to their attorney rosters despite a drop-off in legal work, productivity is slowing, says Dan DiPietro, who oversees law firm client relations at Citigroup Inc.'s Citi Private Bank, in an article he authored for the Am Law Daily. The bank compiles data from its many law firm clients and reports on economic trends based on this research.

Law firms saw average profit per equity partner drop some 9 percent in the first half of 2008, he writes in the lengthy article. Meanwhile, expenses rose by about 10 percent, pushed up, in large part, by increases in associate pay.

The second half of 2008 won't be any better than the first half, DiPietro predicts. And it could be worse—"the common wisdom is that this economic slump is more akin to the downturn of 1991."

But there is a silver lining, he writes: Financial pressure will likely encourage partners to watch expenses more closely and winnow out unproductive attorneys. He also urges law firms to start focusing now on year-end collections.

Eliminating lockstep pay raises for associates would go a long way toward alleviating law firms' current financial issues, Dipietro says in a Legal Week article last month that he authored.

Another good move would be to reduce associate bonuses, yet it is uncertain whether law firms will do this, DiPietro writes in the Am Law article. "The rational approach would be to pare them back, but, while lawyers display rationality and dispassion in the practice of law, they have exhibited 'irrational exhuberance' on this issue in the past."

Related coverage:

ABAJournal.com: "Credit Crunch is Limiting Partner Draws"

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Posted by Wolfgang - 4 months, 2 weeks, 4 days, 6 hours, 12 minutes ago

“Alleviating law firms’ current financial issues” could also be achieved by eliminating the smarmy prestige contests to see who can pay the most to starting associates. Another way would be to start reining in the so-called “rainmakers”, quit worrying about profit-per-partner ratios, maybe even lower hourly rates - and start practicing law to include public service activities like serving again on local school boards or municipal government committees, doing some legal teaching as adjunct faculty at a law school or becoming a participant in a law school’s overseas teaching program - you know, the kinds of things currently frowned upon and actively discouraged because they don’t generate billables and the “rainmakers” can’t get a bigger piece of the pie.
Posted by Wait, what? - 4 months, 2 weeks, 3 days, 8 hours, 45 minutes ago

Wolfgang - I agree with the comment re: associate starting salaries. They are most certainly out of hand. But I am confused about the rest. Things like public service activities and teaching are great aspirational goals. But you fail to state how those things will “alleviate law firms’ current financial issues…” Are you suggesting that these are good for firm promotion and bringing in more clients? And what about “reining in the so-called ‘rainmakers’?” Last time I checked, a law firm needs clients to survive. You can call a firm whatever you want and say that it should aspire to be this or that… But the bottom line is that firms are, first and foremost, businesses. They, like every other business out there from grocery stores to ebay, exist to make money by providing a service that people need or want… Public service is a great and important thing, but I think you missed a key point of the article.
Posted by Pete Wanger - 4 months, 2 weeks, 3 days, 7 hours, 56 minutes ago

It’s too bad more people didn’t see this coming when the practice of law changed from a profession to a business. A lot of factors contributed to this, but when lawyers started to want to make as much money as their more risk-taking entrepeneurial clients, something really bad happened. Now it’s all about the money, and that’s sad.
Posted by Tom - 4 months, 2 weeks, 3 days, 7 hours, 39 minutes ago

Why use a 1,000 person lawfirm in NYC, San Fran, Chicago, etc. @ $900 an hour for a partner when you can use a 5 person firm in Boise, Daytona Beach, or Toledo @ $250 an hour for a partner to draft a Merger document and you get the same quality work.

No wonder the big firms are losing revenue.
Posted by HT - 4 months, 2 weeks, 3 days, 7 hours, 27 minutes ago

Post #3, don’t be so naive, everything is about money and has always been. There are just people full of sh** that tell you it is not. Law is no different from anything else in this world.
Posted by DR - 4 months, 2 weeks, 3 days, 6 hours, 46 minutes ago

Post #5, don’t be so cynical. Most of us work because we have to/want to make a living, but some of us get personal satisfaction from things other than money. I happen to prefer ‘fame’ over money. Ha, ha. Seriously, though, if everything were about money, we wouldn’t have so many brilliant and talented people working for poo wages in various professions, non-profits and other industries. Some people love what they do…and they’ll do it without monetary gain.
Posted by chicagoguy - 4 months, 2 weeks, 3 days, 6 hours, 44 minutes ago

I have a hard time agreeing with cuts in associate salaries when the partners, god forbid, are having their draw cut from $900,000 to $700,000…
Posted by Michael - 4 months, 2 weeks, 3 days, 6 hours, 34 minutes ago

Tom - it’s not that simple. And: the quality is not the same in your example. Your comparison is flawed. Sure, if you go to a top restaurant in NYC to eat a burger and french fries, rather than a sophisticated dish, you may be upset that the burger is more expensive that at McDonalds - but then, why go to a top place if your requirements are low?
Sophisticated deals cannot be dealt with cheaply. Specialist know-how has its value, and that is not $250 an hour.

Lawyers in leading firms got used to making insane amounts of money, and associates wanted their fair share. Fine. Now, in a recession, everyone takes a cut. And to some extent, this could be called normalization.
Posted by J - 4 months, 2 weeks, 3 days, 6 hours, 26 minutes ago

#2:

“I agree with the comment re: associate starting salaries. They are most certainly out of hand.”

Nice of you to be the arbiter on this issue. Like many other young associates, I’ve got $100k+ in student loans in a city with one of the highest costs of living in the nation with a 40%+ tax bracket that under an Obama presidency could go up to 50%+.

I don’t cry poor, you don’t tell me that I’m “overpaid.”
Posted by Donna - 4 months, 2 weeks, 3 days, 6 hours, 26 minutes ago

Everything is NOT about money; that attitude is what’s changed the public’s general opinion of lawyers from respected professionals to contemptible ambulance chasers. What everything IS about, and what brings in clients (and makes money) is advocating zealously for your clients. . . and that includes responding to his calls timely, meeting deadlines, doing your best work, coming to the office on time, seeking and offering assistance when it’s needed, and above all, maintaining honesty and civility in everything you do, whether that’s with your client or your colleagues. When the client is the focus, increasing client numbers and revenue are the result.
Posted by c me - 4 months, 2 weeks, 3 days, 5 hours, 59 minutes ago

If it was about money why would I work as an assistant prosecutor for just slightly more than an school teacher. I love my job by the way.

I think is more of a problem with the perception of lawyers. People think that a law degree is a ticket to a wealthy lifestyle. I think more accurately it’s a ticket to a comfortable lifestyle, but that’s a pretty poor tradeoff if you hate what you’re doing.

While I agree that there are certain things that probably should be done by lawyers charging $800 an hour, those clients are always going to be looking for ways to cut their bottm line.

Finally, my friends who took “big firm” jobs out of law school make $125,000 a year because the majority of them are putting in the time for 2 jobs. Think of it as 40 hours a week plus 40 more in overtime. Personally, I think they’re nuts, but it’s a tradeoff and that their decision.
Posted by Andy the Lawyer - 4 months, 2 weeks, 3 days, 5 hours, 37 minutes ago

Answering # 4—Overpriced large firms are hired by corporate in-house counsel to cover their own backsides within their corporate hierarchies—so that if there’s some critical document drafting error or due diligence failure or a catastrophic litigation result, in-house counsel can report:: “I did the best I could by hiring what must have been the best talent out there. Look at the firm’‘s size and it’s billing rates!”

Answering #8—There is no demonstrable correlation between billing rates and firm size, and quality of legal work. But lawyers in large firms in big cities have much higher overheads to meet (particularly for space), and higher-maintenance lives to service. So they have a vested interest in convincing gullible in-house counsel for large corporations that their product is better because it’s more expensive. Fortunately for them, Barnum was right.
Posted by inhouse - 4 months, 2 weeks, 3 days, 4 hours, 56 minutes ago

#12 - so true.
Posted by Jonathan Edwards - 4 months, 2 weeks, 3 days, 4 hours, 7 minutes ago

I noticed they didn’t say the big firms were operating at a loss. The article noted merely that profits were growing at a slower pace. Profits were still up. so, yes, crybabies.
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Posted by garth - 4 months, 2 weeks, 3 days, 3 hours, 13 minutes ago

Jonathan (#14), it was a news article reporting objectively on law firm profit trends. There was no crying in it. Are you familiar with the phrase “arguing a straw man”. You are guilty of it.
Posted by gimme a break - 4 months, 2 weeks, 3 days, 2 hours, 28 minutes ago

Which makes more sense?: (1) freeze associate salaries in the face of cost of living increases and inflation and reduce their “huge” bonuses by even say $30k each or (2) keep them as they are and drop averages PROFITS (not gross revenues, mind you) per partner from $1.1M to $1M or $0.9M at the big firms? Who will be hurt more by such a cutback? The associate who’s strapped with $150k in student loans and saving to buy a shoebox 1BR co-op in Flushing, or the partner who’s been there for years and just needs to cover the country club membership dues and the pool renovations at his vacation house in the Hamptons?
Posted by Market Forces - 4 months, 2 weeks, 3 days, 1 hour, 23 minutes ago

The large firm business model is dead; they just don’t know it yet.
Posted by Hadley v. Baxendale - 4 months, 2 weeks, 3 days, 28 minutes ago

to Gimme a break: Sounds like “From each according to his ability; to each according to his need.”
Not that I disagree with your proposal but your reasoning is, well, communist. The better busuiness reason that reaches the same result is to see associate comp as an expense to be incurred before profit. As you point out, though, profit per partner is not the same as revenue if they are also salaried.
Posted by anon - 4 months, 2 weeks, 2 days, 23 hours, 56 minutes ago

They say associates’ salaries are bloated
But in big firms that’s often not noted
They continue to fly
With salaries sky high
Seeing the future as sugary coated.
Posted by Non Carborundant - 4 months, 2 weeks, 2 days, 23 hours, 9 minutes ago

Neither the comments nor the article mention the root cause of inability to earn profits: Tort Reform, Money Driven Legislation and Activist Neocon Judges who have clamped down on so many areas of the law, it is killing all of us. Cut off the branch of Premises Liability. Prune back Medical Malpractice. Chop off a root by enforcing all Arbitration agreements. Soon the whole tree gets sick and dies. Sure its about the money - but its more than that. Lawyers have a higher calling - different from Politicians and the Executive. We are part of the Judiciary - the third but equal branch of a Democratic government that is supposed to be a check on the Executive and Congress. The Neocons and Big Business have been wanting to strip attorneys of their power and deny most citizens access to the courts for 40 years because it protects their interests (oppression, denial of process and profits). Now the big firms are starting to suffer. Maybe they will wake up and stop doing their clients’ political bidding and support legislation and judicial appointments that protect access to the courts system for everybody - not just the likes of AIG, Exxon and Wal-Mart.
Posted by Tom - 4 months, 1 week, 6 days, 2 minutes ago

I disagree that smaller firms can’t do the same qaulity work as the mega firms.

“Specialist know-how has its value, and that is not $250 an hour.” This comment is just pure BS. No offense. Go to any city with a population of under 500,000. The high end for salaries is around $350. If those firms were in NYC or San Fran, they could charge $1,000 an hour but they can’t in their market. They do however do the same qaulity work which is why a lot of companies use them.

There is no reason to pay a NYC lawyer $1,000 an hour to draft a contract in today’s market. It is a waste of shareholder money when it can be done cheaper elsewhere.
Posted by Jason - 4 months, 1 week, 5 days, 23 hours, 59 minutes ago

Why are lawyers so greedy in the first place? Is anyone worth $1,000 an hour. I think not.
Posted by Tom - 4 months, 1 week, 5 days, 21 hours ago

#23 - Do you invest? Do you think 23 year-olds on Wall Street should make millions to under-perform broad averages? lawyers, as a whole, are hardly greedy compared to their corporate clients (primarily in financial companies).
Posted by General Counsel - 4 months, 1 week, 5 days, 6 hours ago

Having been the General Counsel of a Fortune 500 firm, I can attest that corporate legal departments are keenly aware that many firms in lower cost locations, especially boutique firms, offer superior value and efficiency to the mega firms located in the country’s largest cities. It’s a “no brainer” to engage a partner with 20 year’s experience billing $350 per hour In Indianapolis over a green second year associate in NYC at $400 per hour who is required to log 2600 hours per year. The benefits of the “mega firm” have been overhyped. While 4,000 attorney, 25 office law firms have their place, attorneys in smaller firms in lower cost centers often present a better value proposition—and have no problem holding their own against the higher cost lawyers from the “Big Firm” in the “Big City”
Posted by alex - 4 months, 1 week, 3 days, 8 hours, 19 minutes ago

“It’s a “no brainer” to engage a partner with 20 year’s experience billing $350 per hour In Indianapolis over a green second year associate in NYC at $400 per hour who is required to log 2600 hours per year.”

I couldn’t agree more. I also look for small boutique firms to do as much of the legal work as possible and only use the mega firms when necessary.

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