Biglaw, In-House Counsel, Partner Issues

The Imminent Capitulation Of Many Big Firms

Is this the year that some Biglaw firms will admit they can't keep up with the rest? Thoughts from in-house columnist Mark Herrmann.

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Several weeks ago, I predicted that, during 2015, the gap between the rich and super-rich big law firms would widen.

I was surprised by your reaction to that prophecy: A chorus of people who think about (or work at) big firms wrote (or called) to second my prognostication. Many, many people seem to think that the prestigious, capital-markets-focused, often-New-York-centric law firms will see their profitability increase more quickly than their litigation-centric, west-of-the-Hudson-oriented counterparts. (How was that for a hyphenated-compound-adjectival sentence?)

So the world seems to agree: The super-rich firms will become even more superbly rich, and the merely rich firms will lose ground. Where does that leave many big firms?

In a world of hurt.

It’s tough for a firm that’s taking in $1 million in profits per partner to compete with a firm that’s taking in $3 million. Competition is basically impossible at the high end: The $1M PPP joint simply cannot pay individual superstar partners $5M. There isn’t enough cash to pay $5M either to the home-grown rainmaker or to the lateral partner who would supposedly repay that investment many times over.

So the super-rich firms will retain their home-grown superstars and buy the best available free agents. The merely rich will suffer at the high end of the market for legal talent.

Competition, however, is equally difficult at the low end: The $1M PPP place may be paying its newly minted partners $400K each, while the $3M PPP joint can pay its newly-minted partners 50 percent more than that. That threatens a serious loss of young talent.

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This assumes, of course, that most lawyers at big firms are motivated primarily by money; they need not be. If a law firm partnership felt like a . . . er . . . partnership, then many lawyers would feel institutional loyalty to their firms and resist the urge to move laterally simply to pocket a few hundred grand more each year. But as institutions grow — and lean on partners to bill more time, attract more business, improve their leverage, and improve their collections, all at risk of being de-equitized or made “of counsel” or let go — it’s hard to maintain true collegiality and the related institutional loyalty. (As Bruce MacEwen recently wrote over at Adam Smith, Esq., every firm says that its distinguishing characteristic is its uniquely collegial culture. I’ll join Bruce in hazarding a guess that there’s a little self-deception at work here.)

The title of this column — “The Imminent Capitulation Of Many Big Firms” — takes the prediction I made last month one step further. I’ve been hearing through the grapevine for years that the merely rich firms are doing everything possible to goose their profitability. This goes beyond merely closing off the partnership ranks to newcomers and discarding the older folks who don’t attract enough business. Firms have started to reduce (or delay) contributions to pension plans, delay payments to lawyers and creditors, accelerate income, and otherwise use financial engineering to boost PPP. Ultimately, however, you can eliminate a pension plan or postpone the payment of bonuses only so many times; eventually, you run out of one-time fixes.

Couple that with the other pressures that the super-rich exert on the merely rich: Starting salaries are already pressuring some of the merely rich; if the market for [top-10-percent student at top-ten law school] new associates hardens and starting salaries increase as the Great Recession fades from the rear-view mirror, the rich will be hard-pressed to match. Beyond that, bonuses at the super-rich firms are going up; the merely rich are already paying bonuses at lower scales or making “individualized” bonus decisions that ultimately save the firm money.

Put all this together, and I’m predicting the imminent capitulation — not bankruptcy or closing up shop; just “capitulation” — of many big firms: Firms won’t concede publicly that they’ve been beaten, but, in private, they’ll give up. They’ll pay less than the “going rate” to new associates (at least in cities in which they can get away with it); they’ll compress the pay scale for associates after the first year; they’ll increase financial demands made of partners; they’ll stop trying to match the bonuses paid by the super-rich; and they’ll otherwise leave the field. We’ll be left with a very small group of super-rich firms competing at the top and the rest of the pack watching, exhausted, from the sidelines.

Will that happen this year? That’s hard to say.

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Is that a welcome development? Not to my eye. (One of my recent correspondents asked me if, as a former Biglaw partner, I watch the new developments at big firms with schadenfreude. I do not. Just regret.)

Is there a solution for the merely rich firms that find themselves unable to compete? Theoretically, yes: Use a glue other than money to hold your joint together. People will make remarkable financial sacrifices to stay at jobs where folks enjoy working with each other, feel as though they’re pursuing a collective common good, are recognized for their accomplishments, and respect and like their colleagues. But actually creating collegiality — as opposed to boasting publicly about your uniquely collegial culture — is hard work.

It’s not clear to me that many firms are up to the task.

Capitulation, here you come.

Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.

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