January 11, 2010 16:46 Age: 4 yrs

A STEP BACK. A STEP FORWARD. New Economy Forcing Changes at Larger Firms

By: Tom McNeill 77L

McNeill 77L

Over the past 18 months, larger law firms have painfully experienced the economic downturn in a changing market for legal services. Virtually every firm has been affected — particularly those with significant practices in economically sensitive areas, such as capital markets, real estate and private equity.

Although business lawyers have counseled clients through similar downturns during the last 25 years, larger firms were historically less affected. This time, firm leaders have been forced to apply downsizing and belt-tightening principles adopted by clients in similar circumstances.

The economic crisis led to a reduction in firm revenues in three important ways. First, clients no longer pursued expansions or combinations or financings to fund those initiatives. The legal work for those activities was the lifeblood of transactions practice. Second, business clients significantly cut legal budgets that historically covered “repetitive” law firm work for items such as securities compliance, benefits maintenance, contract review and regulatory issues. Third, “big case” litigation that often sprang from difficult times failed to materialize as clients elected to resolve disputes rather than litigate.

Firms’ initial reactions followed conventional wisdom. Expenses garnered a hard look, beginning with “soft” costs— entertainment, promotion and marketing. Capital investments in technology or new offices were postponed. Next, attention turned to pay and hiring freezes for staff and associates. Entry-level associate offers were deferred and, in some cases, rescinded. Finally, many firms took the difficult step of laying off lawyers and staff.

For the future, the crystal ball, although cloudy, indicates a continuation of further challenges and some degree of hope. Most prognosticators look for continued mediocre performance in the short run. General consensus is that when firms move past the economic downturn, growth will be modest—far less than rates enjoyed over the past 15 years. The way in which law firms deliver legal services will change. For law students and recent graduates, the impact likely will include:

• Demand for entry-level associates during the next two years will continue to be reduced. When employment returns, growth will be more muted than in the previous 10 years.

• The historical “lock-step” seniority-based structure will be replaced by a competency-based model in which associates progress in pay as they progress in skills. Compensation will become more incentive-based, with bonuses rewarding performance consistent with firm goals and strategies.

• The historical leverage model of a target ratio between partners and associates will give way. Firms will increase the use of contract lawyers for specific projects. Staff attorneys, counsel or special counsel roles will grow as firms restructure to balance compensation, performance, work-force flexibility and fluctuation in client demands.

• Recruiting will be more selective with greater focus on a candidate’s ability to “hit the ground running,” rather than academic performance. There will be greater emphasis on work experience and other skills that will permit a candidate to quickly provide effective client service.

• Law firms will focus on identifying talent with a recognition that different roles will be required, in much the same way a manufacturing company needs different skill sets: production, sales, product development, etc.

Larger law firms are adapting to the new economic reality. Some will be more successful than others in refocusing their structures and personnel to meet clients’ needs. There will not be a “one-size-fits-all” approach as different firms emphasize individual strengths and talents to offer clients a compelling value proposition.

The good news is that law students and recent graduates will have significant opportunities to participate in meaningful careers in this new economic model so long as they are capable and willing to remain flexible in their approach and focused on ensuring their performance provides ­valuable service in ways clients can perceive.

Tom McNeill 77L is managing partner for Bryan Cave LLP in Atlanta. He is a member of the Emory Law Advisory Council.

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