Just Like the Bad Old Days, Only Worse

What's does 2008 promise for the nation's corporate law firms? It's like 2001 all over again, according to a report from the law firm group at Citi Private Bank and the consulting firm Hildebrandt International.

That is, with one crucial difference: This time around, the firms are not seeing an uptick in litigation or bankruptcy to make up the difference.

"In a sense, the current downturn has thus far been a 'perfect storm' in which finance, transactional and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself," according to the report, based on provided to City by 247 law firms.

But wait! Aren't we just at the beginning of a recession? Surely there are big bankruptcies in the offing that will assure fat fees and a switch of the work to law firms' reorganization departments.

"We may see that all happen, but it has not come together yet," says Bradford Hildebrandt, founder and chairman of the law firm management-consulting firm under his name in Somerset, New Jersey. "This is a little trickier to forecast and could be more of a downturn" for law firms, he says.

The report confirms the gloomy outlook that American Lawyer magazine found when it surveyed law firm leaders expected a downturn in business. (Still, 99 percent of them said they planned to raise hourly rates, and two-thirds expected the to raise rates by 5 percent.)

Well, the folks at Hildebrandt and Citi don't think that's going to be easy to pull off: "It remains to be seen, however, whether the firms will reap the full benefits of these increases. As described above, the trends in realization rates suggest they will not."

There is more "client push back" than ever, the report says, from corporations that have come to realize that complex legal work has become routine and should be priced accordingly.

"The legal spend has gotten to the level that it has come to the attention of chief financial officers," says Dan DiPietro, head of the Citi Private Bank's law firm group. "There's pressure on corporate general counsels to keep their legal spend in line."

So, if you happen to be employed as one of the minion lawyers at a Big Law firm, what does this mean for you?

First the good news: This report advocates more merit raises and fewer lockstep increases for associates, rather than firing lawyers for short-term benefit of cost savings. The report advises against "de-equitizations"—that is, the process of de-fanging a lawyer by stripping away his or her equity in the firm. Another round will "only expand the ranks of disengaged and disgruntled people." You don't say?

Now the bad news: If you are a "nonequity," "income," or "service" partner—whatever euphemism your firm has chosen to relegate you to the position of glorified associate—then be afraid, be very afraid.

"The real problem in many firms is very low productivity among income partners, counsel, and other permanent nonpartner lawyers," the report says. "In many cases, careful trimming in those existing ranks may more likely producer greater short-term and long-term benefits than further 'de-equitizations.'"

The fact is, there are more lawyers who fall into this category than ever: The report shows that law firms are not as leveraged as they used to be, owing to the fact that they have become more reluctant to award partnerships: These elder "staff" lawyers represented 25 percent of their nonequity lawyers in 2006, up from 18 percent in 2001.

DiPietro said he's heard anecdotal accounts of some legal headhunters receiving more résumès from nonequity partners seeking to find new homes.

by Karen Donovan