In 2009, during the peak of the recession, associates were sent packing by the dozen. Now, even as the economy slowly regains its footing, partners are being let go in larger numbers. After a year in which things seemed to be rebounding (or at least treading water), why is this trend picking up steam? Chances are, this is just another sign of the changing times.
Three months ago, Philip Thomas, author of Mississippi Litigation Review & Commentary, saw the signs of “the coming crisis” after reading this post on Barry Ritholtz’s The Big Picture. In discussing the growing practice of firms offering “suicide prices” (discounted prices so low that the firm doesn’t make a profit) just to keep associates busy, Ritholtz forecast the next logical move:
“There are simply too many partners and associates at many firms. Adding to the firms’ economic challenges, the revenues of legal process outsourcers (LPOs) are expected to grow 85 percent in the next few years. The result is more attorney layoffs are likely ahead, [Bruce Macewen] says.
Big firms have “avoided the really difficult, awkward conversations” about trimming partner ranks. But “that day is coming, because that’s where the money is,” he says.”
As David Lat, founding editor of Above the Law, was quick to note, the trend of letting partners go is far from new. Law firms have been cutting partner benefits for several years as a way to reduce costs and target under-performers:
“In truth, reductions to partner ranks are nothing new. Over the past few years, many firms have been quietly showing partners the door, or at least “de-equitizing” certain equity partners that they’re willing to keep at the firm, but not as equity partners.”
However, with the bloated salaries and significant perks partners at large law firms are accustomed to, de-equitizing partners is just the first step. It would appear the next step is already here.
Last week, in the Wall Street Journal, Jennifer Smith discussed the latest round of cuts (subscription required) to the partner ranks. Smith points out that the situation isn’t nearly as dire as it was in ’09 or ’10, but significant nonetheless:
“About 15% of roughly 120 firms surveyed by Wells Fargo Private Bank’s Legal Specialty Group intend to cut partners in the first quarter, continuing a three-year trend.
And 55% of the 113 managing partners and firm chairmen who responded to an American Lawyer magazine poll said they planned to ask between one and five partners to leave in the coming year. Though that proportion was roughly steady with the previous year, 5% intended to cut between 11 and 20 partners this year, up from 1.2%.”
That the legal industry continues to tighten its belt is no surprise. That its doing so at the expense of partners, whose decades of experience and business connections aren’t easily replaced, is a wake-up call for everyone.
In discussing these layoffs, Ed Poll, law firm management consultant and author, mused on how the days of finding security in being a partner were long gone. Considered to be tenure of the legal profession, partnerships are now measured by the same metric used to evaluate any business relationship — the bottom line:
“Being a partner is no longer the key to the magic kingdom. Partnership agreements are written in such a way that a partner can be terminated from his/her equity position without much difficulty. “What have you done for me lately?” is not an idle phrase in the world of law firms. Just as every employee in every firm/company must contribute to the well-being of the organization. It’s for this reason that lawyers are concerned about maintaining strong client relationships and not willing to share their client information with others in the firm.”
For Smith, one of the easier ways to find that bottom line was by looking at the number of hours billed. As she wrote in her piece:
“This new round of cuts comes as productivity among the highest-paid tier of a firm’s lawyers remains stubbornly low, with some partners billing less than 1,300 hours a year, down about 30% from the prerecession industry benchmark of 1,900 hours.
“There are a few very major firms that are genuinely and consistently busy,” says law-firm consultant Paula Alvary. But many of the country’s 200 top-grossing firms have partners who remain comparatively idle, struggling to bill 1,700 hours a year, or even 1,500 hours, Ms. Alvary says.”
But at least one LXBN author found this method lacking. Pam Woldow, general counsel with Edge International, made the valid point that many partners don’t partake in the practice of billing 50 hours a week because they don’t have to. Their business relationships and management skills are more valuable to the firm than an extra 600 hours a year:
“The WSJ article misses the point that today productivity goes way beyond the time a partner personally bills (and the firm actually collects). We know of numerous firms who happily tolerate 1,100-1,200 annual billable hours from some of their big dogs in light of their $10+ million in originations or their roles as project executives managing practice groups or engagement teams that include scores of worker bees.
Any measure of partner productivity – particularly senior partners — must consider all the dimensions of their role as driving wheels in a complex economic engine that has a lot of moving parts. In truth, many consider the best measure of productivity to be leverage — a partner’s pivotal role in keeping a bunch of other billers busy and profitable.”
That’s not to say there aren’t partners whose contributions to their firms haven’t declined as the years passed by, but it stands to reason that there’s more going on than billable hours and productivity.
While law firms search for solutions, John Grimley believes the opportunities are there for the taking. A legal services professional focusing in business development, Grimley isn’t sold on internal inefficiency as the only adversary of law firms. Instead, the crisis facing the industry is a lack of international and domestic business development:
“The traditional partnership model can survive – but not without professional management in new business generation. However, as industry professional Greg Lambert outlined recently, traditional law firm management are not predisposed to making those changes.
Should firms not put in place effective business development initiatives capable of generating new revenue, we will continue to see stories of more partner layoffs and the continuing contraction of the AmLaw 200. Firms now face a stark choice looking forward: Choose to generate new revenue effectively — or eventually cease to exist.”
Cordell Parvin echoes many of Grimley’s sentiments in his post on how partners should face this paradigm shift. A career development coach, Parvin also believes that expanding and improving one’s business are the keys to any successful practice. In his post, he offers four tips for generating business to make yourself an invaluable member of a firm.
As all signs point to this practice increasing as 2013 wears on, partners who find themselves in the crosshairs may do well to take note of Parvin’s advice.
To read all of LXBN’s analysis on partner layoffs, check out our tagged page here.