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The Law Is In A Recession, And How To Survive It

by Larry Bodine

Once thought to be recession-proof, the legal profession is now in a recession that will include a drop in profits per partner, declining spending for legal services by corporations, attorney layoffs and a major competitive threat from law firms in London.

Here’s what a panel of experts said at the recent Marketing Partner Forum:

  • We are in a recession right now – it’s pretty obvious,” said Sara Kraeski, Esq., Director of Business Development, Davis, Graham & Stubbs in Denver.  She is a former partner in a securities and private equity law firm and a graduate of the Wharton School.
  • “We are in the middle of the perfect storm. We don’t want to be the best of the buggy makers, we want to thrive and survive, said blogger Patrick Lamb, Esq., the founder of the new Valorem Law Group, LLC, a national litigation boutique based in Chicago.
  • “There are warning signs that road ahead is riddled with landmines.  2008 looking like 2001 – when there were declining profits in the industry,” said Dan Dipietro of the Law Firm Group for Citi Private Bank in New York.
  • There’s a new challenge ahead that has the potential to cause the greatest change ever seen in the legal profession,” said Wendy L. Bernero, Chief Marketing Officer for McKee Nelson in New York, referring to UK law firms that will be able to pick off top talent from US law firms.

Downward trends

The last recession the US suffered was in 2001.  The National Bureau of Economic Research has not officially declared a recession, but it typically announces its findings after a nine-month time lag. 

According to DiPietro, factors leading into the 2001 recession included a significant ramp up in number of law firms, an explosive growth in highly paid new associates and lateral hires, and the notorious burst of the tech bubble.  “Does that sound a little bit familiar as we head into 2008?  Instead of tech bubble, we’re having credit crunch and sub prime loan problem,” he said.

He noted that the growth in equity partner income has been declining for seven years.  At the turn of the century, partners were accustomed to growths in profits per partner averaging from 4% to 5% annually. He said that from 2002 to 2005, the growth in equity partner income rates dropped to 2.5% and during the last year have dropped to 2%.  “When you hit a flat or down year, you affect the glue that holds a firm together, which is money.”

DiPietro said his research showed a drop in productivity as salaries are rising. “It’s not just associate salaries, but more heavy reliance on higher paid lawyers.  There is a dramatically lower level of productivity among income partners. When we enter a year with softer demand, we’ll see pressure to tighten up in the income partner category.”  To wit:

  • Cadwalader Wickersham & Taft laid off 35 attorneys in January 2008 due to what it calls "unexpected and persistent volatility" in financial markets sectors.
  • Mayer, Brown, Rowe & Maw LLP purged 45 partners in 2007.
  • Jenner & Block “de-equitized” 15 to 20 of its equity partners to non-equity status in 2007.

The threat from the UK

Bernero predicted that new regulations governing law firms in the UK will have ample funding to cherry pick top talent from US law firms and to acquire the firms outright.

The so-called Clementi Reforms became law in October 2007, named after Sir David Clementi, who reviewed the regulatory framework for legal services in the UK.  “The British government concluded that there is no good reason to for non-lawyers to become partners in law firms, because it in now way impedes the quality of a lawyer’s advice,” she said.

This means the UK law firms can avail themselves of a wide range of financing options, including selling shares to investment houses and the public.  A law firm in Australia – Slater & Gordon – did exactly that in May 2007, raising $29 million.  The firm is using the money to market itself and to triple its client base.

“I guarantee you that once this happens in the UK, the smart lawyers in the US will figure out a way to adopt this structure and get around state ethics rules,” she said.  She predicted:

  • Well funded UK competitors will fan out in the US and snap up talent and law firms within two years.
  • The recession will make US firms “a virtual play land for firms that are well capitalized, looking to employ our best talent.”

Strategies for survival

The strategies for surviving an economic downturn “are the same ones we’re supposed to be using day to day, but we now start to user greater discipline,” said Kraeski.  Her specific pointers were:

  • Hold on to the good talent you have now.  A law firm needs to keep its profitability level high enough so that strategic people don’t jump ship.  “We need to protect against our competitors, who will be wolves at the door.”
  • Expand as much profitable business as possible.  This means expanding pipelines of revenue and high-margin practices, as opposed to marketing all practices of the firm equally. Look at practices in which the firm is among the top three most prominent, and invest in those practices.
  • “Bulletproof” your relationship with top clients by creating strategic plans to retain them and forming client teams.
  • Analyze the firm’s top 100 clients, segment them into categories of service, and become more than a commodity provider to them.
  • Cross-sell clients in order to keep them.  [According to the Redwood Think Tank, clients with only one partner working for them have a 35% attrition rate (i.e. the odds are 35% that the client will leave the firm within two years).  Clients with three or more partners working with them are half as likely to leave the firm.]
  • Consider layoffs of “service partners” who can be replaced with equally skilled and lower-paid lawyers and don’t concentrate resources in lower producing areas.
  • Exploit the disadvantages of other law firms, and pick off the people at firms that are faltering.  

Bernero also offered a strategic approach: 

  • Review the firm’s five-year plan and adjust it to reflect current realities. 
  • Analyze how a major infusion of $100 million in capital would help the firm achieve its financial goals and better serve its clients.  This is how the UK firms are thinking now.
  • Inquire how the firm’s goals would change if new capital were available.

Copyright 2004-2009 Larry Bodine

About The Author

Larry Bodine is a Business Development Advisor based in Glen Ellyn, IL.  He has helped law firms generate millions in new revenue by devising strategies, conducting business development retreats and individually coaching attorneys. He can be reached at 630.942.0977.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.

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