By DOUGLAS MCCOLLAM
The Wall Street Journal
An unrelenting tide of bad news has swept over corporate America in the last year—and with unemployment continuing to climb, anemic earnings, and the sound of long knives being applied to the whetstone in Washington, things show no sign of looking up. But there is at least one bright spot amidst all the gloom: For once your lawyers are suffering right along with you.
For the last decade, profits at America’s elite law firms rose at a heady clip. Ten years ago no American law firm grossed as much as a billion dollars. Last year 13 did, and at almost 60 firms the average partner’s annual take-home pay is a million dollars or more. It wasn’t just corner-office types who cashed in on the legal boom. Salaries for first-year associates at top firms climbed to $160,000—plus bonus.
Last year, for the first time since the Berlin Wall fell, profits dropped for partners at the nation’s top law firms. The declines were particularly steep at some of the most pedigreed shops such as Cravath, Swaine & Moore, where average partner compensation dropped almost 24%, and Davis Polk & Wardwell, where it declined more than 17%, according to The American Lawyer magazine’s annual financial survey. And 2009 is shaping up to be even worse.
All this has come as a cruel shock for a generation of high achieving legal eagles. During the boom years, managing partners at leading law firms argued that they had created a perpetual profit-making machine.
When times were good, lawyers earned enormous fees engineering mergers and takeovers. When things were bad, they earned enormous fees fending off angry shareholders and breaking up the conglomerates that they had helped put together. When things turned really ugly, they made a fortune carving up the bankrupt carcasses of their former clients and toiling to keep top management out of federal prison. And when questioned whether they bore some measure of responsibility for the malfeasance that felled their erstwhile patrons, lawyers typically answered with a “hey, we just work here” shrug.
It seems plain that a great many members of the American bar fell prey to the same strain of hubris that infected their clients. They embarked on empire building—opening offices from Beijing to Bucharest—and snapping up smaller rivals, confident that the future belonged not so much to the best and the brightest as to the biggest. The movement toward gigantism was virtually uniform across the legal industry.
Now that the fuel to run their massive law machines has been choked off, big law firms find themselves just another smokestack industry with too much capacity and too much real estate. Yet unlike their corporate clients, law firms have a culture ill-suited to the bloody work of downsizing. They hire incoming classes of associates a year or even two in advance and are loath to be caught out in public doing something so down market as layoffs.
But firms are learning to put aside their qualms. In the first half of 2009, almost 3,000 partners and associates at premiere firms were laid off along with many more paralegals, secretaries and other staffers. And that doesn’t count the large number of stealth layoffs.
At bottom, what’s in question is the whole economic edifice of the modern American law firm. Like the pharaohs of old, big firms are enamored of constructing pyramids with an ever-widening base of associates and nonequity partners toiling on behalf of a narrowing band of equity partners at the top. Increasing a firm’s “leverage”—as expressed through the billable hour, one of the most pernicious creations in the annals of commerce—has been the key metric driving profitability at big law firms over the last generation.
Numerous studies have documented the deleterious impact this model has had upon the legal profession and clients. To date, nothing has been able to kill it. It would be ironic indeed if the economic downturn that has cost lawyers so much ended up being the very thing that saved the legal profession from its own excess.
Mr. McCollam, a former correspondent for BusinessWeek, is a contributing writer for The American Lawyer.