How Are Managing Partners Feeling About 2013?

On the whole, pretty good. But there are some warning signs too.

Is this just my weird perception, or are law firm managing partners being surveyed constantly? It seems that every other week, some law firm lender or consultancy or recruiting firm is touting the results of a managing partners survey. Managing partners have things to do other than respond to surveys — like, well, managing law firms.

Despite the proliferation of such surveys, we do appreciate the information and insight they contain. So let’s check out the recently released results of one of the most prominent surveys, the American Lawyer’s annual Law Firm Leaders survey….

Back in September, we wrote about a survey of managing partners, conducted by Citi Private Bank’s Law Firm Group after the end of the second quarter, that sounded some ominous notes. The Am Law survey, which happens to be the tenth annual one, brings happy news in time for the holidays:

Leaders of the country’s highest-grossing law firms are ready to put the recession behind them and embrace a cheerful narrative — if only the world economy will play along. In The American Lawyer ‘s 10th annual Law Firm Leaders survey, 75 percent of the 113 participating Am Law 200 managing partners and chairs described themselves as either somewhat or very optimistic with respect to their firms, a slight increase over 73 percent a year ago.

That’s not much of a move, year over year. But if 2013 ends up being like 2012 for many law firms, then many law firm leaders will probably be happy. Am Law won’t release its profit-per-partner figures until the spring, but if the solid associate bonuses are any indication, this past year will go down as a good one for firms (e.g., Boies Schiller — which had a record year, as David Boies told us the other day).

So firm leaders sound optimistic, but maybe call it guarded optimism:

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[F]inancial instability in Europe, political and regulatory uncertainty in the United States, and the collapse of debt-laden Dewey & LeBoeuf remind them that the world can be a dangerous place. Seventy-one percent of respondents said they expect the economic recovery in the U.S. to either continue at its current plodding pace or slow down.

That sounds about right. We’ve been in this holding pattern for what feels like forever, and there’s no particular reason to expect it to change.

Note the divergence between what the managing partners think about their own firms and the larger economy. It sounds like they expect their individual firms’ performances to outpace that of the broader economy — perhaps because their firms are so brilliantly managed. By themselves.

But the tactics being employed by firms seem small-minded and unoriginal, rather than brilliant:

[L]eaders of Am Law 200 firms have sought to maintain profitability increases by relying on small-scale tactics, such as capital calls, deequitizations, and increased use of alternative staffing models. “Demand continues to be challenged as business’s appetite for new investments, expansions, and acquisitions remains constrained,” says Jeffrey Stone, cochair of McDermott Will & Emery. “We, like other firms, are trying to find that sweet spot of practice mixes, pricing, staffing levels, and fiscal stability.” Stone highlighted his firm’s increased use of alternative staffing arrangements that include nonpartnership-track attorneys.

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Who might work out of places like Wheeling, West Virginia, or Dayton, Ohio. These are perfectly fine places, and perfectly fine positions; it’s just too bad they often don’t pay the kind of money you’d need to service mammoth law school loans.

Here are additional findings from the Law Firm Leaders survey:

  • “Forty-one percent of respondents said they expect their firm’s corporate practice to be their most challenged, a 12 percent increase from a year ago. (Real estate was the second most common answer, at 22 percent.)”
  • “Forty-three percent of respondents said they expect [Europe]’s financial condition to decline further, and 47 percent said they expect it to stay the same.”
  • Litigation is doing well, especially intellectual property litigation: “Eighty percent said they intend to make lateral additions to their litigation practices in 2013, and 57 percent said they plan to add IP laterals.”
  • “Sixty-eight percent of respondents described the size of their first-year class as the same as last year, an increase from 58 percent who gave that answer a year ago. The percentage of respondents who described this year’s first-year class as larger than last year’s declined 8 percentage points, to 21 percent.”

I wouldn’t be surprised if the class-size numbers are even worse (from the perspective of aspiring associates); I could easily see managing partners fudging their responses slightly. Our own research suggests that Biglaw class sizes are much smaller these days.

  • “Forty-five percent of respondents said they deequitized partners in 2012 (a 6 percent increase from a year ago), and 46 percent said they plan to do so in 2013 (an 8 percent increase from a year ago).”

That’s interesting — and fair. Associates and staff shouldn’t be the only ones feeling the pain; less productive partners should too.

Speaking of partner pain, remember how much media attention Greenberg Traurig’s capital call received? In fairness to GT, they’re not alone:

  • “Twenty percent of respondents indicated that their firms made a capital call this year, and 23 percent indicated that their firms would likely make one in 2013.”

So being a Biglaw partner isn’t the cash-collecting sinecure it once was. To put it another way: in Soviet Russia, you pay firm!

Why are capital calls becoming so common? Partly because firms are scared — and justifiably so, perhaps, in light of Dewey’s demise — of debt:

  • “A majority of respondents (58 percent) said that their firms carry bank debt and other third-party debt, but generally their use of it was conservative. Sixty-six percent of respondents whose firms carried third-party debt said that it totaled $10 million or less, and 78 percent indicated that the debt represented no more than 5 percent of total assets.”

These are just highlights from a longer and more detailed piece, by Drew Combs, which you should check out over at the American Lawyer.

Let’s hope that the managing partners’ optimism is justified. Even though 2012 was a fairly good year, at least for those lucky enough to work at large law firms, things could always be better.

Vote of Confidence: Law Firm Leaders Survey [American Lawyer]

Earlier: More Bad News for Biglaw: Waning Confidence of Managing Partners Spells Trouble Ahead