Monday, May 4, 2009

Henderson on Big Firm Woes

Posted by Jeff Lipshaw

Brian Leiter started a comment thread on the status of big law firm hiring freezes, pay contractions, downsizing, and other indicia of the downturn.  Our Bill Henderson responded to Brian's call as follows:

I have been spending a lot of time talking to lawyers these days, with a wide representations geographically and in terms of traditional "white shoe" prestige.

In a nutshell, there is a fairly general consensus that the bubble has permanently burst on the traditional BigLaw model that produces the $160K salary structure. The high leverage firms in major markets are reeling the most, primarily because there is a lot less money being spend by GC's, and they are imposing brutal cost containment strategies. The problem is two-fold: 1) how does a firm de-leverage without damaging its "brand" (law firm managers are probably too conservative on this issue, but the plentiful layoffs provide plenty of cover right now)? and 2) how will the reduced pie be allocated in such a way that the biggest rainmakers don't leave the firm? Stated enough way, "will there be enough profits to keep these rainmakers at the firm?"

And right now, the extent of the BigLaw revenue drop is still unknown (only the last quarter of 2008 was miserable, but all of 2009 could be bleak). Since Profits = Revenues - Costs, cost containment is viewed as key in a way that has never before been seen by fancy corporate law firms.

Two senior lawyers I know with large Am Law firms, both of whom have management duties, told me "there are no jobs right now -- none. Everyone in over capacity. The deferment to January 2010 will likely to until September 2010." Obviously, this would have a huge impact on the Class of 2010, not to mention 2009.

The fact of the matter is that some firms are going to find that money to shore up profits not by reducing the pay of "service partners" (that is going to happen as well), but by reducing associate pay or, at a minimum, shift the risk of lackluster performance to the associates. In other words, $140K or $160K may be the starting pay, but every extra dollar above that will be "merit-based." Other firms are likely to move to much lower starting salaries to enable billing rates that permit bona fide associate training on the client's dime -- in many respects, a sane win-win solution.

Other conversations I have had recently suggest that regional firms are going to be the real winners. They are responsive and cost-effective, and GCs have zero ability to go over budget in the current environment. There is a general perception among many that national law school credentials are not required for motivated, high quality, cost-effective legal talent. At a minimum, regional firms are going to get the opportunity to do work that formerly went to DC, Chicago, NY, or West Coast powerhouses.

At the end of the day, the market is going to look a lot more heterogeneous, which is a good thing because it will reflect original thinking and innovation, rather than mindless copy-cat versions of the Cravath model. In addition, a brand name law school is not going to command the same market clout. Many, many GCs are less impressed by "brand" than by cost containment and results. Elite Big Law will survive, but the frothy Wall Street bubble that produced the extraordinary entry level market of 2002-2007 is over. Clients refuse -- REFUSE -- to have first year associates billed to their matters when those associates leave after two years. Numerous law firm partners have told me about natural experiments in which associate from regional law school A, who everyone underestimated, outperformed entitled and complacent associates from national law school B. The firms are now systematically studying these observations using the techniques of industrial psychology. It is very interesting stuff.

What I wonder about, having been twice a GC, is what's moving at the margins.  Bill is absolutely correct in perceiving that the major regional law firms provide great value relative to the financial center firms.  The reality is that (a) the top graduates from law schools that tend to fall below Brian Leiter's radar screen turn into crackerjack lawyers on a regular basis (hmm - I wonder whether there is a meaningful way to measure this?), and (b) there are plenty of "elite" school lawyers who make family or lifestyle choices not to go to NYC, Chicago, Washington, etc.  I remember the "Harvard, Michigan, Chicago" trained lawyers at the top firms in Detroit as being wholly the intellectual equal of their peers at Skadden, etc.

Having said that, my casual empiricism was that there was a fairly clear chasm between what one would send to NYC and what one would not.  In short, it tended to fall along "bet the company" or "not bet the company" lines.  Thinking as a former poacher, there's no question that my former partners and I at Dykema in Detroit were intellectually and professionally capable of handling, say, the Fiat/Chysler deal; it was far less likely that we would.  I just don't see that kind of work migrating significantly to the regional firms.  On the other hand, thinking as a former game-keeper, I'd have to wonder about the sense of a GC who sent "routine" work to the Wall Street firms.  To take an example, we used the Butler Snow firm out of all places, Jackson, Mississippi, for our tort litigation because they had some great trial lawyers, and were a bargain.  The real question then, if GCs are moving work from the biggies to the regionals, what is it?

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Associate pay at biglaw has been out of control for 20 years.there is no value to be passed on to clients at billabe hourly rates necessary to make them profitable to the firm. Smart value driven general counsel should never agree to big hourly rates for first year associates.I suspect this tradition of paying a first year associate more than a federal judge was cooked up in some private club as a yardstick by competing managing partners in a game of oneupsmanship. Total bs. Its amazing what clients will tolerate.

Posted by: jsf | May 8, 2009 8:09:14 PM

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