The fable of the ant and the grasshopper may have lessons for the world of large law firms.

As regular readers of Above the Law well know, most major law firms — with a few notable exceptions — did not pay spring or mid-year bonuses in 2012. Our associate readers generally viewed this news with disappointment, while our partner readers had less of a problem with it.

But perhaps even associates should have been supportive of their firms’ decisions not to pay spring bonuses. Storm clouds are gathering over the law firm world. So says a recent report by Biglaw’s biggest bankers, over at Citigroup….

We mentioned the report a few days ago in Morning Docket. It’s from Dan DiPietro and Gretta Rusanow of Citi Private Bank’s Law Firm Group, the largest lender to U.S. law firms. Here’s how they explain their methodology (over at Am Law Daily):

These results are based on a sample of 176 firms (79 Am Law 100 firms, 47 Second Hundred firms, and 50 additional firms). Citi Private Bank provides financial services to more than 600 U.S. and U.K. law firms and more than 35,000 individual lawyers. Each quarter, the Law Firm Group confidentially surveys firms in The Am Law 100 and Second Hundred, along with smaller firms. In addition, we conduct a more detailed annual survey. These reports, together with extensive discussions with law firm management conducted on an ongoing basis, provide a comprehensive overview of financial trends in the industry and insight into where it is headed.

And what does the latest Citi midyear report tell us? Here are selected findings:

  • Revenue grew by 2.7 percent compared with the first six months of 2011, but it was driven more by enhanced collection efforts than by an increase in demand for legal services: “Across the industry, demand grew just 0.3 percent during the first half, a considerable slowdown from the 1.5 percent growth we reported for the first quarter.”
  • Expenses grew faster than revenue, increasing 4.1 percent for the first half of 2012 compared to the same period last year.
  • The growth in expenses was driven mainly by a rise in operating expenses — e.g., rent, infrastructure upgrades, insurance — which climbed by 5.5 percent. Compensation expenses increased at a slower rate, by 2 percent.
  • Headcount grew by 1.1 percent during the first half of 2012 compared to the first half of 2011.

What does this all add up to? According to DiPietro and Rusanow, “With weak demand growth and the continuation of expense growth, it is likely that expenses will continue to grow at a faster pace than revenue, squeezing margins and making it tricky to achieve even low single-digit profit growth.”

Yikes. So, against this grim backdrop, what’s the good news? Here’s what Rusanow told Bloomberg News:

Layoffs haven’t occurred, she said. Instead, firms have cut compensation costs by not awarding spring bonuses to their associates like last year.

For associates, your “spring bonus” is getting to keep your job.

And this is where we should now pause and praise partner prudence. They certainly faced pressure to pay out spring bonuses, pressure that they resisted. And now that we have the data on law firms’ financial performance in the first half of 2012, we can see that resisting this pressure was commendable.

Firms fared poorly even without the extra burden of paying spring bonuses; had they paid out spring bonuses, things would have been so much worse. Firms already engaged in significant staff layoffs this year; had they paid out spring bonuses, we might have seen significant lawyer layoffs as well.

(By the way, we’re starting to hear somewhat sporadic reports of stealth layoffs of lawyers, but nothing ripe enough for reporting. If you have information you can share, please email us or text us: 646-820-8477.)

Remember, of course, that partners have a significant informational advantage over associates when it comes to a firm’s financial performance. Although the amount of information that associates (and even rank-and-file partners) get about a firm’s performance varies from firm to firm, the general rule, of course, is that partners, especially partners in managerial positions, have the most information. Because these partners have the greatest amount of information, it makes sense for them to make the decisions about compensation, hiring, and related matters.

An individual associate — say, a busy litigation associate — might think, “I’m on track to bill 2700 hours this year. I deserve a spring bonus!” But that associate doesn’t know, for example, how slow the transactional side of her firm is. As Gretta Rusanow pointed out to Bloomberg, transactional work is slower than litigation right now — and litigation work isn’t that lucrative, because corporate clients are getting discounts. But all those transactional associates sitting around billing 100 hours a month are still pulling down six-figure salaries. Should they be getting spring bonuses on top of that?

So to our associate readers, we say, “Patience. You might feel overworked and underpaid, but you don’t see the big picture for the whole firm. Things aren’t going as well as the busy ones among you might think. So just trust that the partners are making the right choices — not just for you, but for the entire organization. If things pick up in the final quarter of the year, which is a key time for law firm collections, then you’ll see it in your year-end bonus.”

And to our partners readers, we say, “Stay the course. With a few notable exceptions (cough cough, Dewey), you have steered your vessels skillfully through troubled seas. Resist the siren calls of overspending on compensation — whether for associates or for partners (cough cough, Dewey). Embrace the risk-aversion that comes naturally to you as lawyers, and you will be rewarded.”

Citi Midyear Report Sees Signs of Trouble Ahead for Firms [Am Law Daily]
Business of Law: Firm Revenues [Bloomberg News]
Why BigLaw Didn’t Pay Spring Bonuses [ABA Journal]


comments sponsored by

46 comments (hidden for your protection) Show all comments