Law Shucks, Layoffs

This Week in Layoffs: 12.12.09

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Ed. note: Above the Law has teamed up with Law Shucks, which has done excellent work translating all of the layoff news into user-friendly charts and graphs: the Layoff Tracker.

This recession is turning out to have all of the unemployment and none of the rebound of the recession in the early 1980s. Unemployment is expected to average 10% through the first half of the year, which will stifle any recovery rooted in consumer spending or economic growth.

Still, technical signals indicate the recession is ending, as the US economy grew by 2.8% last quarter and is gaining at a 3% clip this quarter. That rate is also expected to continue through the first half. Fortunately for transactional lawyers, a cause (or effect, depending on whom you ask) for that moderate growth is that lending has started to loosen, which is allowing more deals to get funded. President Obama is also meeting with executives of 12 major banks to see how he can get them to increase lending to small businesses.

Unfortunately, the catalyst for recovery from that early 80s recession isn’t available anymore. Paul Volcker, Chairman of the Federal Reserve Board under Presidents Carter and Reagan, had raised the federal funds rate from 11.2% in 1979 to 20% in June 1981. As he started chopping the rate back down, recovery followed (albeit two years later). Through the first half of 1983, the economy grew by 7.2% and unemployment dropped over all of 1983 from 10.8% to 8.3%.

Bernanke doesn’t have that tool in his toolbox: the current target rate is 0.00-0.25%

Law firms continue to meander along behind the broader economy. After the jump, we highlight their economic efforts over the past week.


Layoffs have certainly slowed to a trickle as the holiday season and end of year approach. On the pure layoff front, DLA Piper was the only major firm at which layoffs were reported, and those were the result of integrating and right-sizing its Middle Eastern operations.

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We’re curious to see how associates will react to the news that layoffs are culling the partner ranks (yes, even real, "equity" partners), according to Citi Private Bank’s Dan diPietro. We mentioned last week that UK partners had definitely been hit, so now it’s been confirmed in the US as well. Will it be comfort, that we’re all in this together? Schadenfreude, that the associates’ misery is now the partners’ as well? Or despair, that the ship be sinkin’?

We’re curious, though, how diPietro concluded that layoffs were worse in the third quarter than the second, unless stealth layoffs are far, far worse than expected.

Don’t expect next year to be much better for layoffs, though. Royal Bank of Scotland, where 80 of the UK’s top 100 firms do their banking, predicts that as many as 5,000 additional lawyers could lose their jobs next year. Maybe regulation will stem that tide? (Sorry, Americans, our labor laws aren’t so helpful)

The leaked notes from Simpson Thacher’s partners’ meeting from earlier this year were also telling. The whole thing is worth a read, but most-relevant for this series is the following:

However, none of the top-tier firms has engaged in lay-offs. We do not want to be the first top-tier firm to engage in lay-offs. From a financial point of view, given the market practice that has developed, with respect to severance, the cost savings produced by a lay-off, as opposed to our aggressive performance-based reductions, is modest [no savings this year / $30K per/point next year]. [The course we are on produces a 100 attorney reduction over a two-year period/ probably only 75 down from today’s headcount.]

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First off, we’re amused by thinking about what Simpson Thacher considers "top tier" firms – that must have been quite an affront to Sidley, Latham, and White & Case, V20 firms that did have public layoffs. So Simpson Thacher went on a course of stealth layoffs, and it wasn’t the only one. As we reported earlier this year, Cravath, Sullivan & Cromwell, and Kirkland & Ellis were V10 firms that were caught doing stealth layoffs.

So the partners did the math and realized that laying off 100 people would only save $3 million next year – peanuts compared to the firm’s $904 million gross revenue in 2008 – and decided that was a fair price to pay to avoid the PR hit. Which makes sense. But then they decided to go ahead with "aggressive performance-based reductions." That, by the way, confirms what we’ve been saying at Law Shucks all along about the hypocrisy of stealth layoffs (which is that performance-based layoffs in this economy are not comparable to normal years, because the standards are being raised to force attrition (but see below)). And the numbers back it up – Simpson Thacher is clearly not the only firm conducting layoffs under the guise of performance evaluations.

And that’s where we at Law Shucks have a problem – if a firm is willing to pay $3 million to keep its reputation intact, it should do so wholeheartedly, and not by trying to hope its layoffs go unnoticed because they’ve been styled as "performance based."

Transparency is also why we’re more forgiving of deferrals, salary cuts, and the like. Of course, it’s easy for us to prefer candor, we’re not on that chopping block.

There is one potential problem with deferrals, though. They’re transparent, but not illuminating. Mayer Brown waited all the way until December to ask a few members of its (nominal) class of 2009 to extend their deferrals out to October 2010 (then McDermott Will & Emery followed suit). That news came only a month before they had expected to start. So the analog to a stealth layoff are these indefinite deferrals. To the extent firms are hoping the deferees will lose interest or go away, we think that’s an equally bad form of passive-aggressive layoffs. If they’re just not sure on when the work will pick up, the firms should either fish or cut bait – pick a date and stick to it, or start cutting people loose now. In most cases there’s already a class lined up and deferred behind them anyway.

Back to that comment about not liking standards being raised to force attrition. We actually don’t have a problem with DLA Piper instituting "a curve" for its associates. That’s not "raising" a standard – just like you only have to be faster than one guy when a bear is chasing your group, you should always have to be better than one of your classmates. It’s like that in the real world, as Jack Welch has famously championed:

A third common criticism of differentiation is that the continual removal of the bottom 10% eventually forces managers to push out perfectly good employees and thus pits people against one another. But if that thinking is right, why do championship teams replace the bottom of their rosters every year? Because the best organizations, in business as in sports, believe that performance can always improve.

So while the bottom 10% is out, the top 20% do well. For them, there are bonuses. Don’t forget we track those on Law Shucks as well.

The article concludes on Law Shucks with another non-BigLaw firm that had layoffs, and the updated tallies for the week, month and year.

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