Recession battering law firms forcing tough choices and innovation
I have noticed over the past few months at various business conferences and networking events a curiously steady rise in attendance by legal professionals. Where before 2007 many top professionals were too booked-up to spend time trawling for new clients, now client relations, conference appearances and networking are back in vouge.
Alan Heuer has an insightful story in the New York Times describing the downsizing taking place at New York top firms. Associates and partners are being let go to adjust to the drop in business.
The recession is crashing the business model for NY full service commercial law firms, which in good times used to compete amongst each other for the right to pay first year incoming baby-lawyers $160,000 per year plus bonuses. With the Lehman Brothers collapse, CDO catastrophy, and surrounding economic crisis the capital markets transactional work dried up. The transactional deal-flow ran down to a trickle, and there had already been a long drought of IPO work.
Lawfirms work mostly on a cash on hand basis, and do not carry large reserves. As such, very quickly there is not enough money to keep the large numbers of associates waiting for new work. The firms have been forced into firing both partners and associates and telling new recruits their start date will be delayed by a year. Heuer Reports:
In the first quarter of 2009, demand for legal services in New York decreased by nearly 10 percent over 2008, according to the Hildebrandt International Peer Monitor Index. At least 10,000 employees at major firms across the country have lost their jobs so far this year, according to the macabre but wildly popular “Layoff Tracker” run by another blog, lawshucks.com.
Steve Verrier a Partner at White & Case (2,000 lawyers in 34 offices in 23 countries) described his choices upon assuming the management of the firm as follows:
Do nothing, which risked the firm’s survival; couch layoffs as decisions based on poor performance; or own up to the crisis and bid large numbers of lawyers a harsh but needed goodbye.
They decided for the layoffs. A partner at White&Case explained the atmosphere has changed significantly at the large firms: “The problem is we’re supposed to all be in this together. But at some point, you stop and think: ‘Well, maybe we’re not.’ ”
Crisis forces innovation in the legal field.
Clients are beginning to look ever more closely at the legal bills they receive. Large businesses have started to employ legal auditing service companies. Essentially they audit the clients’ legal bills, identifying incorrect entries as well as inefficiencies and possible over-billing. The company gets paid a percentage of the “savings” achieved. As one can imagine, the performance fee structure ensures sufficient motivation to find mistakes and cost-cutting opportunities. For example, Stuart Maue saved Kmart $15 million in legal and professional fees in the bankruptcy proceedings.
Denver based Law firm Watson& Associates just announced that it is now offering a flat-price full-service packages for businesses. The reasoning is as follows:
The firm hopes its innovative approach to helping clients reduce the staggering fees typically associated with legal advice will strengthen the firm’s position as a business partner, rather than a line item in the budget.
We are hoping that law firms will also recognize their role in bringing the economy back, by offering legal services to startup companies which hope to rapidly grow their business on a discount basis, or in exchange for some equity (where this structure is allowed by the bar) or structured on growth basis. By sharing in the risk with the entrepreneurs, the law firms are creating a network of grateful and loyal entrepreneurial customers and their referrals, but also are investing into ensuring the survival of their own future client base.
This is an opportunity for lawyers to help out seed and early-stage companies by giving them some basic services and business contract forms cheap or free, instead of charging heavy fees later by telling the company about the damage done to the valuation, money lost to overtaxation, or intellectual property lost because they could not afford lawyers and failed to use proper legal forms.