Biglaw, Layoffs, Partner Issues, Partner Profits

Risky Business: Overcapacity in Biglaw

There are too many lawyers in Biglaw. Is your job at risk?

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Overcapacity. The Biglaw word du jour. Too many lawyers working in Biglaw to meet demand. Or is it too many lawyers in Biglaw to foist on that subset of clients still willing to pay those rates that guarantee profits-per-partner increases? Either way, the word is out. Biglaw is suffering from overcapacity. Something must be done.

Some firms will undoubtedly send out the message that every single one of their lawyers is in great demand. Debate among yourselves whether or not these firms are “stealth layoff” candidates.

Other firms have already taken action (e.g., Weil Gotshal) — sweeping, public action. Hopefully they did not enjoy what they were “forced” to do too much. The first cut is the hardest, as they say, and who can say that one of these firms won’t decide to wield the layoff katana like a sake-infused samurai?

I suspect that most firms are actually taking a bit of a wait-and-see approach. One thing that has always impressed me about Biglaw financial teams is how accurate they usually are regarding predicting future near-term performance. Depending on how this summer goes, I believe many firms will be able to say with a fair degree of certainty what this year will end up looking like for them financially. The start of the year was soft, so many firms are already in a bit of a hole to match last year’s performance. For those firms that are looking at a rough 2013, some may decide to make their cuts now, and try for a fresh start in 2014. Others, perhaps in an effort to project strength (aimed at maintaining favor in the eyes of possible laterals/merger partners mostly), will avoid making any cuts until at least the turn of the year.

At this point, anyone (with the exception of equity partners who are in firm management or control business in an amount at least 10 percent more than their firm’s reported profits-per-partner figure) who thinks they are immune from a painful compensation haircut or an outright layoff is naive. There is a consensus that Biglaw is overstuffed with lawyers — to the tune of 10 percent or more, according to Bruce MacEwen — and both central management and the Biglaw consultants who advise them are agitating for action by more firms. Add in an elite firm like Weil paving the way, plus plenty of recent examples of firm failures as cautionary tales, and you have a recipe for Biglaw instability that is arguably more widespread than the troubles in 2008-2009. What I mean is that a wider cross-section of Biglaw lawyers, of all experience levels, are at some form of risk for “action” by Biglaw’s overlords. And with the transfer of power from Biglaw partnerships to centralized management, there is less of a check on such actions being taken, with little to no notice to affected parties.

So who is most at risk?

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Let’s keep it simple and divide Biglaw’s current attorney workforce into three risk tiers. We can define inclusion in a risk tier as the relative likelihood of facing an adverse employment action, whether it be outright dismissal or, for partners in “for cause” firms, significant compensation reductions. The assumption remains that Biglaw firms are profitable enterprises, coping with declining demand, and not at risk of imminent dissolution. As we have learned, in the latter situation, no one is safe.

It is also important not to discount the importance of practice group strength in evaluating any one lawyer’s particular risk. As an example, a rainmaker in a weak or undesired practice group can be at higher risk than a service partner in a group that is going strong.

We are painting with broad strokes here. Let’s start with the low-risk tier, or the tier whose members are least likely to face an adverse employment action. This group includes the following: 1) Biglaw management (unlike Egypt, Biglaw firms do not have an independent military arm that can decide on and implement a wholesale replacement of the Executive Committee in one fell swoop); 2) rainmaker partners in strong practice groups, meaning groups that are currently profitable or in a cyclical downturn but historically a firm strength; 3) service partners, counsel, and associates in profitable groups, provided they are enjoying strong individual performance; and 4) recent laterals, assuming they have demonstrated an ability to generate new business for the firm, or have been quickly integrated into a strong practice group. Roughly speaking, no more than 25 to 40 percent of any one firm should fall within this category.

At the opposite end of the spectrum are those lawyers unfortunate enough to be swimming in the piranha-filled high-risk Biglaw pool. While the consultants say Biglaw generally suffers from 10 percent overcapacity, I am sure that some firms, or some practice groups within firms, are saddled with a higher level of overcapacity. Twenty-five percent or so sounds about right. In this most vulnerable group I would place the following: 1) unprofitable partners in branch offices or non-core business groups, 2) any service partner who has never generated any business (higher risk the more senior they are), 3) any counsel or associate who is not on pace to bill 1800 hours or whose time gets trimmed by more than 15 percent on a regular basis, 4) recent laterals who have not generated any business at the firm, or are otherwise billing less than 1600 hours per year on an annualized basis.

Everyone else? You fall in the middle-tier. Meaning you need to be vigilant, protective of any assignments you have, and prepared to start a job search on short notice. Résumés should be current, lists of contacts and matters updated, and you may even want to start putting together a business plan. While Biglaw may not yet have its attorneys on one-year contracts, it is clear that the vast majority of Biglaw attorneys need to consider themselves on “short-term deals,” with renewal rights belonging to the firm that employs them. That includes partners at many firms.

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Whether or not this is the career you signed up for is irrelevant. Welcome to the “new normal” in Biglaw.

What risk tier do you think you fall into, and how likely do you think your firm is to take action this year against underperforming attorneys? Let me know your thoughts by email or in the comments.

Anonymous Partner is a partner at a major law firm. You can reach him by email at atlpartnercolumn@gmail.com.

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