The coming big law partner bloodbath

ATL reports about possible big problems with cutting and deequitizing partners at Jenner & Block:

One tipster quips: At this pace Jenner and Block will soon be populated by top level experienced partners (billing clients hundreds of dollars per hour) and nobody else. Service partners are gone. Yet another tipster describes the situation as a "partner blood bath." Our sources explain that high-end rainmakers are demanding a larger share of the profits, at the direct expense of junior partners who do not bring in business.* * *

Is this really an issue that is localized to Jenner & Block? Fundamentally, there is only so much money you can save by laying off associates and cutting salaries (just like there is only so much money you can save by firing staff). Some firms will undoubtedly start taking a hard look at the people who are supposed to be generating business.

I have no information about J & B specifically, and this may or may not be happening there. But I think it’s clear it will be happening eventually at a large number of big law firms.

The basic problem is that the current large law firm model is breaking down. Under this model of associate leveraging, senior partners are supported by the profits generated by a large number of associates. But for various reasons, including but not limited to current market conditions, clients are not continuing to support those profits by paying the billing premium the firm tacks onto to what they pay associates.  They will pay high prices only for the high-end rainmakers that attracted them to the firm. Unfortunately, this means in the near term that associates and lower-end partners in large law firms may be out of luck.

In the long term there will be high demand for law-trained people in an increasingly regulated environment.  The problem, as I've discussed, e.g., here, is that we have an unsatisfactory structure for delivering those services, frozen into place by ethical and licensing rules.  These rules, among other things, restrict law firm capital structure by requiring owners to be lawyers. The rules need to change before we can reach a more satisfactory equilibrium. 

Comments

[Lord Oberon]

I think it all depends on the client, case, and rainmaking partner. Some clients are penny pinchers the way you describe. Some cases need lots of associates and non-rainmaking partners just to run them. Some rainmakers have enough clout that the client will do what the rainmaker tells them (Rodge Cohen comes to mind). With all these possibilities running around, I think you are going to see a lot of variation from firm to firm, and the current law firm model is likely not going to go anywhere anytime soon.

[Clerkety Clerk]

But truthfully law firms aren't necessarily "owned" by lawyers. The banks that fund the line of credit that keep firms afloat for the first part of the year plays a big role in the actual management of the firm (see: credit agreements that contain minimum attorney utilization/realization requirements for instance).

[Onlooker]

Provocative piece, and two good comments from LO and CC.

I think LO's got it right. There's so much structural and business base variation across and within AmLaw 200 firms (esp. variation in practice mix and leverage profile) that the impact on firms' "models" (or on practice groups' models within firms) will vary widely. Moreover, for many firms, the recession impact may not be as drastic as originally thought. The 1Q09 productivity survey results from Peer Monitor and Redwood indicate that firms with good practice area diversity are doing much better than most observers foresaw (dreaded) in 4Q08. The survey data indicate that most such firms saw demand bottom around November 08, and steadily trend up since (although not return to the levels of early 08). That demand recovery has made the moderate cost cutting accomplished by most firms for 09 a more adequate response to softening demand than they dared hope. Lastly, while the billable hour may or may not be on its way out eventually, most firms report that the actual alternative fee pressure from clients today is far less than suggested (or urged) by observers.

As to CC's comment re surrender of firm sovereignty to the banks, that's a real risk, but far fewer firms are that exposed to the banks than one might think. Two reasons: Banks have put firms on a credit diet (or tried to feed them indigestible covenants); and in recent years firms got more serious about accumulating non-borrowed working capital after the splashy firm failures earlier this decade, while firm leaders got more conservative after watching the leaders of those failed firms attract special exposures. There have been some recent exceptions, and may be more to come, but I'd bet that there will be far fewer firm failures than have been predicted by some observers.

[Pays the bills]

Here is one reason that the law firm model is broken that doesn't seem to get enough discussion. The services delivered are not worth the prices charged. Partners in the big firms have gotten used to taking home $1.5 million per year, and even the supporting lawyers expect high compensation. However, it is far from clear that the majority of legal services delivered by these firms are worth the prices necessary to generate those kinds of profits. Transactional lawyers often follow already established precedent but continue to charge premium rates. Litigation fees frequently exceed the amount of money at stake, other than in the largest and most complex cases. Lawyers need to re-evaluate whether they are really delivering value equivalent to the fees that they charge. The large firms have, in the past, largely coordinated their billing rates and salaries in order to maintain their profits, but market conditions are finally putting pressure on that gentleman's agrement. It is high time.

[Doug Park]

I agree with Pays the Bills that many lawyers are not worth their rates. With respect to corporate lawyers (both partners and associates), many simply are not equipped to give their clients effective business advice. Can they advise their client how to capture long-term value from a merger or acquisition? Or what their client's corporate strategy should be? Most lawyers help their clients complete transactions smoothly. While that does add value, it may not add value commensurate to the current billing rates.