The (Sort of) Good News on Law Firm Bonuses Followed by Ominous Trends

Maybe it’s just coincidence that on the heels of New York City law firm bonus announcements last week, there has been a host of articles on the precarious state of law firm (and other) legal employment.  As readers of this blog know, the reason I pay close attention to large law firm trends is that such firms are major market drivers.

Of course, whiffs of danger are not emanating only from law firms.  President Obama announced a two-year pay freeze for all federal workers, including government lawyers.  So, in addition to the pressure that decreased hiring at law firms is putting on the supply of government lawyers, anyone looking for (or retaining) a position as a lawyer in the federal government now knows what his or her salary will be for the next two years.  Fortunately, we’re not in an inflationary economy, so the real value of those salaries is likely to be preserved in the near term.

Back to law firms.  A survey of large law firms by The American Lawyer is just bad news all around.  First, almost 70% of respondents in the AmLaw 200 (the nation’s biggest firms, not all of which responded) indicated that they have 2011 plans to de-equitize some partners and/or ask some partners to leave.

When there’s bad news for partners, associates won’t fare well, either.  And indeed, the survey reports that more than 87% of respondents (that’s, um, almost 9 in 10) report that they won’t expand or will further shrink new associate hires in 2011.  That’s on top of sharply reduced hiring in 2010.  Next to that, the quibble over staring dates is just that—a quibble.

The basic finding of the AmLaw survey should not surprise us—the recession has awakened law firms to be more sensitive to their business model and, while there may be few core changes in, say, billable hours as the principal means of generating revenue, it’s pretty simple to ask more out of fewer associates when there aren’t many other opportunities available in the legal market.  And that’s what’s happened.

In addition to that is some indication of declining revenue, especially in mid-tier firms, according to the ABA Journal.  That’s led to announcements of staff cutbacks.  Staff layoffs generally come before associate layoffs, and are sometimes an effort to forestall such layoffs, but there have been some announced lawyer layoffs as well.  It isn’t just a question of billable hours, of course.  Almost all large firm lawyers I’ve talked with over the last few months tell me that activity (which will translate into billable hours) has jumped significantly since Memorial Day and shows no signs of slowing, at least until sometime in 2011.  And law firms have made that level of activity work with a smaller number of lawyers than in the past.  Why will they change?  They won’t, until demand makes it absolutely necessary to bring in more lawyers.

If you’re considering going to law school, I realize that this spate of warning trends may not have much effect.  After all, significant lawyer cuts in the last few years have been accompanied by rising law school applications.  In addition, Vivia Chen reports (admittedly, the survey sample was small) that most incoming law students think they’ll beat the odds of a bad market and don’t adequately weigh the debt load they’ll incur as a result of law school.  So the law school bubble may continue.  But it shouldn’t—I’ve said before that the most valuable skill a prospective law student can develop is learning how to use an Excel spreadsheet to get a clearer idea of what her or his future financial life is likely to hold.  That’s work I do with my private clients.  Entering law students should have a comfort level that they’re not buying something they can’t afford.  A law school bubble is no better than a housing bubble; at least in the latter, it’s just your house that gets foreclosed.

~ by Kyle Pasewark at Advise-in Solutions on November 30, 2010.

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