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[Diana341]

A Study in Why Major Law Firms Are Shrinking

By ALAN FEUER
Published: June 5, 2009

AFTER months of anxious planning, it was time for Hugh Verrier to finally press send.

The firm’s offices on Avenue of the Americas are quieter these days, as fewer lawyers generate fewer billable hours.

In his two years as chairman of White & Case, the venerable Wall Street law firm, Mr. Verrier had already laid off 70 young lawyers and shuttered offices in Bangkok, Dresden and Milan. He had watched top partners flee to competitors and suffered a depressive 2008 holiday party at Cipriani’s, which had half the budget of the prior year’s $500,000 event — a Neroesque fete at the United Nations with fireworks and a band.

Now Mr. Verrier, who had worked exclusively at the century-old firm since leaving Harvard Law School in 1982, sat in his office high above 44th Street and Avenue of the Americas, considering the e-mail message he was about to send. It announced that 200 more lawyers would lose their jobs, nearly 1 in 10 at the firm over all — and not just young associates with everything in front of them, but some million-dollar-a-year ones like himself, the ones with twin mortgages, kids in private school and no Plan B.

“I greatly regret having to take these actions,” Mr. Verrier wrote, making a nod to the “deterioration of the global economy” and the need to slash expenses in recessionary times. Then he dropped the bomb: “a reduction in the number of our partners commensurate with current and anticipated needs.”

The reaction was swift and frantic. Partners who were staying scurried to protect their favorite workers; résumés were burnished and beamed out to recruiters.

As the victims were informed at private meetings with supervisors, a group of young lawyers downed tequila at a nearby tavern and morbidly scratched a “whack list” on a legal pad with guesses as to who was getting the ax.

Within nine hours of that March 9 message, 231 comments — several, it appeared, from within the firm itself — were posted on the popular lawyers’ blog abovethelaw.com. They ranged from the apocalyptic (“Armageddon!!!”) to the ghoulish (“Is anyone handing out towels for this bloodbath?”), to the disturbed (“AHHHHH!”).

Months later, the corridors of White & Case are quiet, the happy buzz of business having gradually been replaced by a melancholy pall of diminished billable hours. Many office doors are shut — not because of meetings, but, as one associate put it, so that “the man with the ax” cannot find the occupants. Type-A partners, once glued to their BlackBerrys, suddenly have time for their spouses and their children; ladder-climbing junior lawyers linger over lunch.

“People are shellshocked,” said one top partner at the firm who, like many of its current and former lawyers, spoke on condition of anonymity for fear of retribution. “If they survived the first two rounds, they’re happy to have a job, but are still very nervous. And if their phones don’t ring, if their work doesn’t come back with a vengeance, they fear they aren’t long for this world.”

As the apocalypse on Wall Street ripples out into the larger economy, a thick red tide is lapping at the once-impregnable foundations of New York’s corporate law firms, threatening to turn the industry — and with it, some iconic city characters — into an endangered species.

A few top firms, like Thatcher, Proffitt & Wood, established before the Civil War broke out, have already gone under in the flood; the carnage of layoffs has touched even sterling names like Proskauer Rose, Dewey & LeBoeuf and Clifford Chance.

In the first quarter of 2009, demand for legal services in New York decreased by nearly 10 percent over 2008, according to the Hildebrandt International Peer Monitor Index. At least 10,000 employees at major firms across the country have lost their jobs so far this year, according to the macabre but wildly popular “Layoff Tracker” run by another blog, lawshucks.com.

At the root of the law-firm crisis, legal experts say, is the credit crisis, which has pulverized the need for traditional practice areas like structured finance, mergers and acquisitions and private-equity transactions — the very things that have always kept a high gleam of polish on the city’s whitest shoes. The downward trend has been unrelenting: fewer Wall Street deals mean fewer Wall Street lawyers.

While the legal industry is hardly battling the existential threat that is facing, say, the newspaper trade, Big Law — especially in competitive New York — is facing a potential paradigm shift as fundamental as the one that has hit investment banks and the auto industry. Big, as a business model (let alone as an expression of the national mood), seems bound for obsolescence.

The Hildebrandt index found, for example, that at the nation’s 20 top-grossing law firms — 12 of which are in New York — average profit per partner and revenue per lawyer both dropped in the first quarter of 2009, for the first time since 1991.

At White & Case, the average profit per partner last year was $1.6 million, down from $1.7 million the previous year, according to AmLawDaily, the Web site of The American Lawyer.

The firm, which is sixth on the Hildebrandt list, reported a 7.7 percent increase in profits last year, to $1.4 billion, but has been among the most aggressive in cutting staff: nearly 600 people, 279 of them lawyers — including seven of 73 partners in London — have been fired so far in what Mr. Verrier described in a rare interview as a “gut-wrenching” process.

“It’s a very painful thing to have to go through,” said Mr. Verrier, a husky man in pinstripes. “It’s hurtful to read the criticisms directed at the firm — and at the partners — when this is a great institution that, under economic pressure, had to adjust.”

Jerry Kowalski, a legal consultant who tracks the New York market, said that “the mood at White & Case — and at probably 15 or 20 more firms in New York — is kind of like sitting at a deathbed and watching a close relative wither away. It’s like you’re right there in the I.C.U. with the patient and you know that the condition is terminal.”

FOUNDED in 1901 by Justin D. White, a Cornell graduate who married a banking heiress, and George B. Case, who is said to have invented the squeeze play on the baseball field at Yale, White & Case is — or was — the quintessential gentleman’s firm. It was built not only on the grubstake — a possibly apocryphal $500 — of its founders, but also on their close relationship with Henry P. Davison, a plutocrat philanthropist who helped create the Federal Reserve.

Its first coup was winning the legal work of Bankers Trust Company in 1903. The growing firm managed French and British procurements in the United States during World War I. Over the years, its clients have included establishment pillars like August Belmont Jr., U.S. Steel and General Electric.

Rudolph W. Giuliani worked there briefly in the 1980s (and was criticized for the firm’s work on behalf of Gen. Manuel Noriega of Panama). These days, headlines mention Thomas Lauria, head of the firm’s financial restructuring group, who represents opponents of the Chrysler bankruptcy in federal court.

From 1980 to 2000, White & Case was led by James Hurlock, a Rhodes scholar and visionary autocrat who tripled its staff of lawyers and expanded into markets as diverse as Helsinki and Hanoi. Mr. Hurlock was succeeded by Duane Wall, who turned the focus back toward New York. When Mr. Verrier took over in 2007, foreign offices, like London, quickly questioned his ascent, partly over his early decision to bring in the consulting firm McKinsey & Company — which suggested that the firm was overstaffed.

Mr. Verrier denied that McKinsey had convinced him of the need for making layoffs and suggested there was still “a vital role for the global law firm,” even while acknowledging an increased tendency among clients to seek out regional firms for certain work.

“Is there a paradigm shift?” he asked, seated in a 40th-floor conference room with a privileged view of Times Square. “I don’t think anyone has a monopoly on what the future’s going to bring.”

Which may, in fact, be the point. Much like Merrill Lynch or General Motors, firms like White & Case, which still has more than 2,000 lawyers in 34 offices in 23 countries around the globe, are teetering on the beanstalk — at a moment when their pool of associates is large as case volume dips and clients demand lower fees.

“I hear the stories all the time,” Mr. Kowalski, the consultant, said. “Real estate lawyers are honing their skills playing solitaire. Younger lawyers are gossiping all day and scaring the crap out of one another. The head of the corporate department of a major firm just told me that he hasn’t billed a minute’s worth of work in the last two weeks,” he added.

Peter Zeughauser, a legal strategist in California, said that “for a quarter of a century, there has been this enormous boom in business, mostly due to expanding capital markets, and the top-tier firms kept hiring as if the boom would never end. Most of the top firms are completely out of balance, with lots of young associates underfoot — and associate pay is the biggest component of law firm overhead. And on Sept. 15, when Lehman Brothers went under, everything hit a wall.”

That wall was especially hard because — remarkably like such ventures as the Mafia or the ice-cream vendor — many large firms operate on a cash-in-hand basis, with insufficient reserves to weather a slump.

With Wall Street in a meltdown, Big Law suddenly found it not just indecorous but impossible to pay young lawyers six months out of law school $160,000 a year to stare at their hands. (Indeed, after offering jobs to dozens of third-year law students last fall, White & Case told 60 percent of them they would have to wait a year to start.)

Mr. Verrier said he saw the storm approaching shortly after he took control in 2007, and considered three options, in consultation with a group of core partners: Do nothing, which risked the firm’s survival; couch layoffs as decisions based on poor performance; or own up to the crisis and bid large numbers of lawyers a harsh but needed goodbye.

His choice to confront the situation directly, while lauded by many on the staff, carried the risk of seeming weak, of becoming the poster child for the industry’s demise. But he saw it as opening a window for White & Case to eventually reposition itself.

“Sometimes it was people who had recently joined the firm, but sometimes it was much-more-senior people at what seemed to be a natural break in their careers,” Mr. Verrier said of those who were let go.

“There were tough judgment calls,” he admitted, adding that he tried as best he could to preserve the firm’s culture and that the “how” of the dismissals, at least in his mind, was as important as the “why.”

THE gentleman’s profession of the law is becoming a vestige of the past, removed enough from reality to be remembered, like phone booths or fedoras.

Philip K. Howard, a senior partner at Covington & Burling, another multinational firm, may be the closest thing to a gentleman lawyer that one is likely to find these days. He is courtly, white-haired, civic-minded and blessed with an aristocratic pair of arching eyebrows. While he declined to speak directly about White & Case (“I’m not really interested in the business of the law”), he touched on the firm’s current troubles by suggesting that as the bottom line increases in importance, the traditional role of the lawyer as a trusted counselor slips away.

“To the extent that lawyers are simply churning out the same problems one after the other and are treated as factors of production to be laid off or not because of market forces or marginal declines in profitability,” he said, “the emotional and professional commitment that goes along with being an adviser and a solver of problems begins to diminish.”

This bottom-line focus was in evidence at a recent meeting of the New York State Bar Association’s beefed-up Committee for Lawyers in Transition. It was a grim affair: a few dozen laid-off lawyers trading business cards and eating the catered chicken at a Midtown firm while another few hundred chimed in virtually, via the Internet. The talk was of “regrettable losses,” “reduced-hour arrangements” and contract assignments in which one might contribute in “a nonbillable” (read “no pay”) way.

The classic New York law firm is a highly developed ecosystem populated by certain native species: there is the brash, aggressive partner leveraged by lifestyle and, rising from below, like a creature out of Darwin, the ambitious associate who pulls all-nighters doing scut work in hopes of one day taking the chair.

But the natural order of this world has been set on end by the economic crisis and the possible disappearance of fixtures like the pyramid system (under which associates are thrown en masse at certain cases, fattening the fees), and the billable hour itself (increasingly replaced by flat rates or retainers in a client’s market). The tectonic plates have begun to shift in a nauseating manner, bringing fear, ambiguity and psychological scars.

“You used to feel the intensity in the office,” said a longtime partner at a big New York litigation firm. “When people walked to the bathroom, they would actually scurry. Now it’s more of a stroll.

“For the first time in their lives, people feel sort of useless. All of a sudden, you can go to lunch for two and a half hours and really not be missed. It’s a blow to the ego. You’re talking about people who have never really failed.”

At White & Case, the tensions have become so fierce that some people now fear staying home even if they are sick. Market forces have replaced “the social contract,” a top partner there said: camaraderie is “not terribly strong,” because “people are very scared.”

“When you finally make the partnership, you can walk into a room and certain assumptions travel with you: This is someone who knows what they are doing, who has intelligence and authority,” the partner said. “While that’s still basically the case, it was a much more collegial place when I first got to the firm. Now it’s colder.

“The loyalty of the institution to its people, and vice versa, isn’t really there anymore — it’s a different animal from what a lot of us were used to. It’s much more of a business now and less of a true partnership. The problem is we’re supposed to all be in this together. But at some point, you stop and think: ‘Well, maybe we’re not.’ ”

http://www.nytimes.com/2009/06/07/nyreg ... =cse&scp=1

[rayiner]

IP folks, what is your take?

--ImageRemoved--

[teaadntoast]

Where'd you get the chart?

[rayiner]

Where'd you get the chart?

ATL comments.

[teaadntoast]

Where'd you get the chart?

ATL comments.

Where'd THEY get the chart?

[rayiner]

Where'd you get the chart?

ATL comments.

Where'd THEY get the chart?

--LinkRemoved--

[teaadntoast]

Where'd you get the chart?

ATL comments.

Where'd THEY get the chart?

--LinkRemoved--

A bit jarring, but the article from which it is sourced is actually much more positive.

And a 10 per cent drop in spending is significant, but doesn't necessarily translate into a decrease in hiring.

http://www.abajournal.com/news/study_fi ... rtune_1000

[rayiner]

ATL comments.

Where'd THEY get the chart?

--LinkRemoved--

A bit jarring, but the article from which it is sourced is actually much more positive.

And a 10 per cent drop in spending is significant, but doesn't necessarily translate into a decrease in hiring.

--ImageRemoved--

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

[rayiner]

Today's ATL thread is really gold:

And my point is that there shouldn't be a thread dedicated to frightened law students wetting themselves.

The entire industry is going through a seismic change.

Man up and stop complaining.

I am a fifth year associate and I have bills to pay and it is damned slow here. You, on the other hand, can easily find a job that fits your needs.

Until then, STFU.

Like working at Starbucks? At least a laid-off fifth-year has valuable skills that can land him another legal job. A fresh JD just has a useless education he can't sell back.

[teaadntoast]

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

Could. Again, there's nothing in the chart or the article that indicates that hiring will necessarily be affected.

I'm not saying you're wrong, only that it seems as though you're beginning to bypass alterative considerations in favor of the worst possible scenario when considering the job market outlook.

[rayiner]

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

Could. Again, there's nothing in the chart or the article that indicates that hiring will necessarily be affected.

I'm not saying you're wrong, only that it seems as though you're beginning to bypass alterative considerations in favor of the worst possible scenario when considering the job market outlook.

If you were running a major company, and business decreased by 10 percent such that you needed to trim your overall head-count, would you continue to hire people?

Law firms actually will to an extent, because they're terribly-run operations. We just have to hope that they're terribly-run enough to fire a bunch of mid-levels so they can hire a bunch of fresh grads.

[dresq]

IP folks, what is your take?

--ImageRemoved--

This is from "results of a survey of 370 corporate counsel at Fortune 1000 companies." The numbers are not great, but for those who want to focus on patents it may not be quite as bad as that. A lot of those places in the survey aren't tech companies and can afford to cut back on trademarks and copyrights a bit; it's not critical to their enterprises. Just remember, the economic engine of the US is innovation. If we lose that, everyone (especially those of us with tech backgrounds) is screwed. I'm not going to worry about things I can't control. Bottom line: orientation starts on August 17, and I'm going to be there.

[teaadntoast]

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

Could. Again, there's nothing in the chart or the article that indicates that hiring will necessarily be affected.

I'm not saying you're wrong, only that it seems as though you're beginning to bypass alterative considerations in favor of the worst possible scenario when considering the job market outlook.

If you were running a major company, and business decreased by 10 percent such that you needed to trim your overall head-count, would you continue to hire people?

But that's not what the chart - or the article from which it was sourced - is saying.

The data doesn't have anything to do with a decrease in business - it's indicating that there will be less spending on a given area. That might mean less hiring, but it might also mean fewer lavish parties, smaller expense accounts or other perks. Without real numbers we have no way of knowing whether a ten percent deduction means anything.

Moreover, this data is based on a survey of only 370 people, none of whom are identified. We don't know who they are, for whom they work or where they're located. It's an awfully small sample size from which to be generalizing.

[rayiner]

The data doesn't have anything to do with a decrease in business - it's indicating that there will be less spending on a given area. That might mean less hiring, but it might also mean fewer lavish parties, smaller expense accounts or other perks. Without real numbers we have no way of knowing whether a ten percent deduction means anything.

Less spending = less business = less hiring/more firing.

There are ways to deal with reduced revenue while keeping staff, but nobody in industry (any industry) ever does that.

[teaadntoast]

The data doesn't have anything to do with a decrease in business - it's indicating that there will be less spending on a given area. That might mean less hiring, but it might also mean fewer lavish parties, smaller expense accounts or other perks. Without real numbers we have no way of knowing whether a ten percent deduction means anything.

Less spending = less business = less hiring/more firing.

Again: No. Actual. Numbers.

And interviews with 370 people, about whom we have no information, are hardly grounds to make general predictions about the state of the market overall.

[rayiner]

The data doesn't have anything to do with a decrease in business - it's indicating that there will be less spending on a given area. That might mean less hiring, but it might also mean fewer lavish parties, smaller expense accounts or other perks. Without real numbers we have no way of knowing whether a ten percent deduction means anything.

Less spending = less business = less hiring/more firing.

Again: No. Actual. Numbers.

And interviews with 370 people, about whom we have no information, are hardly grounds to make general predictions about the state of the market overall.

You don't need numbers to tell you how corporate America operates. Less spending = less business = less hiring is exactly what you're seeing in every industry affected by the recession. I'm sure CE2JD can attest to the fact that this is what is happening in our industry (software) as well.

Interesting stat: employment at graduation for UGA (the undergrad, not the law school) fell from 51% to 19% this year.

[teaadntoast]

[You don't need numbers to tell you how corporate America operates. Less spending = less business = less hiring is exactly what you're seeing in every industry affected by the recession.

Yes, actually you do need real numbers.

Let's say, for the sake of example, that the 370 people surveyed work for the smallest 370 companies in the Fortune 1000, and that each firm spends, in total, $100,000.00 on IP litigation in a typical year. These are firms that don't do much IP work to begin with and include no major tech or pharmaceutical projects in their portfolios. They plan to cut their spending by 10 percent.

Let's also assume that, of the remaining 630 companies, half spend the same amount ($100,000.00 each), but that the other 315 have large R&D departments or similar and spend a solid million each on IP litiagtion annually. None of these remaining 630 firms have any plans to cut their spending.

The decrease in spending by the smaller companies surveyed has a negligible effect on the actual amount spent by the industry overall in this scenario.

You simply can't, without knowing the actual budgets of these companies for IP spending or who they are, make huge generalizations about what it means for the market.

[rayiner]

[You don't need numbers to tell you how corporate America operates. Less spending = less business = less hiring is exactly what you're seeing in every industry affected by the recession.

Yes, actually you do need real numbers.

Let's say, for the sake of example, that the 370 people work for the smallest 370 companies in the Fortune 1000, and that each firm spends, in total, $100,000.00 on IP litigation in a typical year. These are firms that don't do much IP work to begin with and include no major tech or pharmaceutical projects in their portfolios. They plan to cut their spending by 10 percent.

Let's also assume that, of the remaining 630 companies, half spend the same amount ($100,000.00 each), but that the other 315 have large R&D departments or similar and spend a solid million each. None of these remaining 630 firms surveyed have any plans to cut their spending.

The decrease in spending by the smaller companies has a negligible effect on the actual amount spent by the industry overall in this scenario.

You simply can't, without knowing the actual budgets of these companies for IP spending or who they are, make huge generalizations about what it means for the market.

That's kinda contrived. The article doesn't really give me any reason to believe that the sample is unrepresentative.

[teaadntoast]

That's kinda contrived. The article doesn't really give me any reason to believe that the sample is unrepresentative.

It may be contrived, but still speaks to the point that having real numbers is important before jumping to conclusions.

And I can think of a number of reasons why the data might be unrepresentative, not least of which being that we have no idea for whom it was collected and that it was analyzed by a private firm for a private client.

(Not to say that anyone is being nefarious, only that we don't know precisely why this dtudy was commissioned which might very well mean the companies selected were chosen for a specific purpose unknown to us and not because they are typical representatives of the industry.)

[Dick Whitman]

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

Could. Again, there's nothing in the chart or the article that indicates that hiring will necessarily be affected.

I'm not saying you're wrong, only that it seems as though you're beginning to bypass alterative considerations in favor of the worst possible scenario when considering the job market outlook.

If you were running a major company, and business decreased by 10 percent such that you needed to trim your overall head-count, would you continue to hire people?

Law firms actually will to an extent, because they're terribly-run operations. We just have to hope that they're terribly-run enough to fire a bunch of mid-levels so they can hire a bunch of fresh grads.

Yes, because three years from now you're going to need third-year associates. You can't just hire someone fresh out of law school and give them third-year work.

[rayiner]

A drop in spending could amount to a tremendous decrease in hiring in the short term. When a company needs to shrink its head-count overall, why would they hire anyone at all?

Could. Again, there's nothing in the chart or the article that indicates that hiring will necessarily be affected.

I'm not saying you're wrong, only that it seems as though you're beginning to bypass alterative considerations in favor of the worst possible scenario when considering the job market outlook.

If you were running a major company, and business decreased by 10 percent such that you needed to trim your overall head-count, would you continue to hire people?

Law firms actually will to an extent, because they're terribly-run operations. We just have to hope that they're terribly-run enough to fire a bunch of mid-levels so they can hire a bunch of fresh grads.

Yes, because three years from now you're going to need third-year associates. You can't just hire someone fresh out of law school and give them third-year work.

I posted an analysis of the last recession, and this is indeed what law firms did last time around. Who knows what will happen this time...

[Splitt3r]

I posted an analysis of the last recession, and this is indeed what law firms did last time around. Who knows what will happen this time...

Are we ruling out the possibility that law firms are going to learn from their mistakes?

[rayiner]

I posted an analysis of the last recession, and this is indeed what law firms did last time around. Who knows what will happen this time...

Are we ruling out the possibility that law firms are going to learn from their mistakes?

I don't think that was necessarily a mistake, though.

Firing mid-levels and hiring new folks makes a lot of sense if you really think about it. First, because of the downturn, there is not enough mid-level work available to keep those folks busy. So excess personnel are largely costing you money. Now, there may not be enough first-year work to really keep a (small) first-year class busy either, but at least they're cheaper than mid-levels.

Second, what happens when the economy recovers? If you kept around those mid-levels instead of hiring new people, then you'll have an exodus of attorneys when experienced people end up leaving and doing whatever they were planning to do before the recession hit. Since you didn't hire any people during the recession, you now have a big gaping hole in the most profitable part of your business. You can hire a bunch of laterals to fill the gaps, but if everyone does this, there will be a huge demand for laterals which will drive up their salaries. You'll probably have to hire from the small-law ranks, where the folks don't have the same background/training they would've had if they'd been at a big firm from the beginning.

[98234872348]

.

[stateofbeasley]

I started law school in 2003. The economy was still utter crap. I remember my college friends not even being able to get temp work.

I also made the assumption that the economy would turn around by 2006, and therefore going to law school was a good idea. I went to Temple, an unremarkable school as far as rank, but a school with decent local reputation.

Big mistake.

The economy did turn around, but law jobs were still incredibly difficult to get. The top 10-15% of my law school got biglaw with salaries at all-time-highs, while the rest of us either struggled to get government jobs or jobs at gutter firms with low pay and no benefits.

Many of my peers, especially those who went to expensive schools like Villanova and Widener, couldn't afford the low paying jobs and were forced to become document reviewers to pay the student loan bills. Their finances are basically ruined for the next 20-25 years. Even 3 years out, most people I know who worked before law school make less money as lawyers than they did before they went to law school. Only the biglaw people saw real income gains.

Most law schools are a scam, and it is hard for most graduates to find a job in good times as well as bad.