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At the NALP Conference: It’s the End of the World As We Know It

Thursday, April 2, 2009 2:32 PM - By David Lat

NALP logo.JPGAs mentioned previously, your above-signed writer is currently at the annual education conference of the National Association for Law Placement (NALP). Yesterday we attended some excellent events.

One of our favorite presentations, despite its deeply depressing nature, was “Understanding the Current Legal Economy.” Law firm management guru James Jones — Managing Director of Hildebrandt International, and former managing partner of Arnold & Porter — spoke to a packed ballroom about how the legal industry is, in short, completely screwed (at least for 2009, and probably beyond).

We took some notes on Jim Jones’s talk, which we’ve written up in this post. It is, we confess, what some might call a notebook dump. Alas, we don’t have the time for a more polished write-up.

Even if inelegantly written, we think you’ll find it interesting. Check it out, after the jump.

In his presentation, James Jones sounded themes similar to those raised in Adam Cohen’s superb New York Times piece (via Morning Docket). But Jones provided a level of granularity — as well as statistical data collected by Hildebrandt and Citigroup, a major lender to large law firms — that one wouldn’t see in a general-interest publication like the Times.

What was 2008 like for large law firms, and for the legal profession as a business?

Pressures on profit margins grew in 2008 (and will get worse in the near future). In terms of practice areas, comparing 2008 to 2007, bankruptcy was up — quelle surprise — and so was securities regulation.

The real surprise: litigation, usually a countercyclical practice, was soft. In response to a question from the audience, Jones acknowledged that some litigation work may be going to smaller — i.e., non-Am Law 200 — firms.

In terms of law firm merger activity, 2008 was similar to prior years. Surprisingly, it was also similar in terms of dissolution activity, at least in the sheer number of dissolutions (even if the 2008 dissolutions were fairly high-profile ones — e.g., Heller, Thelen, Dreier). In 2009, expect to see additional dissolutions and/or “mergers in lieu of dissolution.”

What will 2009 be like for the legal industry?

It won’t be pretty. Jones predicted there will be “no quick turnaround” for the legal business in general. There may be some improvement in specific practice areas: bankruptcy, labor and employment, regulatory (with a capital markets focus), and infrastructure / stimulus-related legal work.

Unfortunately, even if there’s improvement in the economy in 2009 (which there may not be), this won’t help law firms. Law firms are cash businesses — so an uptick in legal work in late 2009 won’t show up in the books until 2010.

For 2009, Jones is predicting flat to declining overall demand for legal services. There may be some modest rate increases — but these may be offset by heavier discounting, as well as no uplift from premium fees.

Expect modest revenue growth, in the 3 percent range. This will, however, vary wildly from firm to firm. Also look for additional layoffs and other cost-cutting measures, more merger activity, and higher law firm indebtedness (according to Citigroup, which lends to many law firms).

For the first two months of 2009, legal fees and demand for legal services were down, and lawyer productivity was down dramatically — by almost 50 percent. According to Jones, law firms face “a productivity challenge.” Average billable hours are plummeting across all classes of attorneys. Interestingly enough, equity partners are now working as hard as associates. This suggests hours hoarding.

What’s different about this downturn?

Several things, according to Jones. If you discount the popping of the tech bubble, which didn’t affect the broader economy as much, you have to go back 18 years to find a crisis comparable to this one: the S&L debacle. As a result, the current economic climate is one that many lawyers have no experience navigating.

“You have people at firms for whom this is terra incognita,” said Jones. Many lawyers, including many partners, weren’t in legal practice when a downturn of this severity last hit the profession. Biglaw is “coming off of two decades where the mantra for firms was ‘growth and expansion.’”

Jones explained that law firm profits are driven by five levers:

  • leverage (ratio of associates / non-partners to partners);
  • productivity (hours worked);
  • rates (what firms charge per hour);
  • collections (ability to collect from your clients what you charge); and
  • expenses.

    According to Jones, in the decade leading up to this bust, one factor was truly driving profits: rates. Rate increases of 6 to 8 percent per year were fueling record profitability. In this climate, however, pushing through rate increases will be tough: “We’ve awakened the sleeping giants of our clients.”

    Jones explained, however, that the main issue isn’t hourly rates so much as the overall cost of legal services. Clients are happy to pay for the $1,000-an-hour partner who can solve their problem efficiently. The problem is that the provision of legal services is not, in general, an efficient process.

    The legal business is moving from a period of never-ending growth to a focus on increased efficiency. This is the natural development pattern for a maturing industry. (Jones didn’t mention this example, but one thinks of the automobile industry today, or the steel industry before its overhaul — not inspiring comparisons.)

    This natural trend is being exacerbated by the economic crisis. So firms need to shift gears from a growth model to one of increased efficiency and cost-effectiveness.

    What are some trends that we will see in the years ahead?

    This crisis may mark the end of the legal world as we know it — but not necessarily in a bad way. The Great Recession may trigger significant changes in the way that law firms operate as businesses. Here are some trends — or at least “trendlets,” as Jim Jones put it — to watch out for:

    1. Rethinking associate compensation.

    There will be pressure to end the fixed starting salary model. Firms will move towards more flexibility, away from lockstep schemes, and towards incentive- and competency-based compensation models.

    There may be some rollback of associate salaries — which we’ve already seen at some firms. Joked Jones: “I can say that and you can’t, because I’m not violating the Sherman Act.” (Ah, antitrust humor — gotta love lawyers.)

    2. Rethinking staffing models.

    The model of a firm made up basically of (1) partners and (2) partnership-track associates, or essentially (1) business owners and (2) owners-in-waiting, is a very inefficient model. Expect to see a growth in other types of attorneys — e.g., staff attorneys, counsel / senior counsel, and contract lawyers.

    Law firms may move towards a Big Consulting or Big Accounting model, where you have many more types of employees. There is nothing wrong with a firm bringing on board a specialist to work on certain types of cases without any expectation of that lawyer ever becoming a partner — and firms should stop treating such specialists as second-class citizens.

    3. Rethinking models for the efficient delivery of legal services.

    Expect a “disaggregation” or “unbundling” of legal services, either in terms of top firms working alongside cheaper firms as co-counsel on the same case, or top firms offering less expensive services under the same roof. Think of in-house lawyers focused on discovery work — basically, staff attorneys — who cost clients less than partnership-track associates. Or librarians who pull cases and then turn them over to associates for reading and analysis, which is cheaper than having associates do the Westlaw / Lexis searches themselves.

    4. Rethinking pricing models for legal services.

    Jones said that he’s been predicting the death of the billable hour forever. After years of it not happening, he said: “I concluded that the billable hour is the single most resilient idea in Western thought.”

    But now he’s dusting off his old speeches. This economic crisis may finally precipitate a significant shift away from the billable hour model. We’re already starting to see more project pricing, for example.

    Question and Answer Session

    During the Q-and-A session, an audience member got up to offer her ambitious proposal for changing the legal profession. She described her pet theory as a “crazy, radical scheme, untested by experience.” Responded Jones: “We’re running the whole country that way these days!”

    Her idea: two years of law school, not three; have students work at firms as “interns,” with low compensation; charge clients less. (A more radical version: have associates pay their law firms for the training they receive in the first few years of practice.)

    Jones observed that such a system isn’t completely crazy, insofar as it’s similar to legal systems in other countries. In Canada, for example, there’s the apprenticeship period known as “articling.” In the U.K., law degrees are undergraduate degrees; graduates then go out for more practical training.

    The challenge: persuading U.S. universities to move away from the current, entrenched system. “Law schools are cash cows,” Jones observed.

    CONCLUSION

    There’s no denying it: 2009 is “plainly going to be a challenging year” for law firms (read: absolutely awful).

    But the recession may trigger reform. “A financial crisis is a terrible thing to waste,” said Jones. “We may someday look back upon 2009 as a tipping point for the legal profession.”

    With the Downturn, It’s Time to Rethink the Legal Profession [New York Times]

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    Posted in: Biglaw, Conferences / Symposia, Layoffs, Money, National Association for Law Placement (NALP)

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