What will next year look like at the biggest law firms in the land? For the first time since The American Lawyer began surveying law firm leaders in 2003, their answer is: We’re not sure.
“Anybody who is running a law firm who pretends to be able to predict with certainty what the firm is going to be doing in the next year and how it’s going to fare is dreaming,” says DLA Piper joint CEO Francis Burch, Jr., summing up the general feeling of his counterparts in The Am Law 200. Of the more than one dozen managing partners interviewed about their responses to our survey, all expressed the same sentiment: The future is up for grabs.
But managing partners are still reluctant to throw away their head cheerleader pompoms. Even as uncertainty clouded the responses of the 112 firm leaders who answered this year’s survey, they remained surprisingly upbeat about their firm’s prospects. Make no mistake: Firm leaders know the boom has busted; most of them responded to the survey after September 15, the day that Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co., Inc., was sold. Few, however, were willing to say–at least for now–that their business will be dramatically different as a result. Even in a time of financial turmoil, they’re counting on clients to continue to demand high-end legal services.
Our 2007 survey saw the first leaks in the ballooning optimism that had buoyed The Am Law 200 since we began conducting the firm leaders survey. But this year the air rushed out. More than half of our respondents reported feeling uncertain about the year ahead, up from a quarter a year ago. And though a solid 38 percent of firm leaders still expressed optimism (a self-fulfilling prophecy, perhaps?), 10 percent copped to pessimism–a significant number considering that pessimism didn’t even register as a response until last year, and then only at a measly 2 percent. Managing partners are projecting lower profit gains, smaller billing rate increases, and fairly stagnant deal flow.
But they said they can live with that. “More of us are taking the view that next year is going to be a very soft year for large law firms, and we have to adjust the practice and scope of our business to reflect that,” says one chairman of an Am Law 50 firm. “I think institutions of our size can do that, so I don’t see much panic.”
Perhaps the best indicator of this business-more-or-less-as-usual attitude is the relative stability our survey respondents projected for head count in 2009. Even amid reports of layoffs and recalled offers to summer associates, 72 percent of firm leaders said that they plan to increase head count–not growing as robustly as in previous years, to be sure, but growing nevertheless. Many firm leaders, in fact, said in interviews that economic uncertainty breeds opportunities for smart lateral hiring. “We’re starting to see a trend of people [changing] firms because they’re not confident in the vision their current firm has of the future,” says Bingham McCutchen chairman Jay Zimmerman.
Another reason for head count growth is less salutary. According to Zimmerman, fewer associates are leaving firms these days unless they’re pushed out. So as firms add new first-year classes, they’re still carrying senior associates who, in better times, would have departed for other jobs. The drop in attrition rates is why firms have had to become more aggressive about weeding out unproductive lawyers. “Quite frankly, I think that there are a lot of law firms out there that are not doing any kind of layoffs or reduction in force, but I think every law firm is looking at its annual evaluation process and being pretty hard-nosed about that,” says a chairman of a large global firm.
Firm leaders are counting on revenue growth in such traditionally countercyclical practices as litigation and restructuring to offset a contraction in deal work and real estate. Intellectual property litigation, in particular, continues to be a growing practice area, according to interviews with managing partners. Morrison & Foerster chair Keith Wetmore points to the relatively healthy tech sector as evidence that IP will remain strong. “Technology companies have not been so hard hit by this [downturn] that they have stopped protecting their crown jewels,” says Wetmore.
Most managing partners are wary, though, to pronounce litigation the answer to law firm woes. “We can’t sit back and say it’s cyclical and we’re going to keep on making buggy whips the way we always did,” says Alston & Bird managing partner Richard Hays. “Whenever there is disruption or a change of regimes, new opportunities arise. The lawyers who understand that best are going to be better positioned to service their clients.”
Many of these new opportunities, say firm leaders, will arise from the upheaval of the last few months, as the federal government has stepped in and taken a dominant role in the country’s finances. Regulatory work–which, in a telling indicator of how quickly things change, was not a practice area our survey asked about–appears to be managing partners’ pick for next year’s hot sector. “We’re witnessing the largest movement of power from the private sector to the public sector since the New Deal,” says K&L Gates chairman and global managing partner Peter Kalis, who calls regulatory work a “cycle oblivious” practice.
And in an ironic role reversal, leaders are predicting that firms with outsized structured finance practices or those heavily invested in the capital markets–the very firms that boomed before the credit crunch hit–will have the toughest recovery. Before the downturn, says Howrey managing partner Robert Ruyak, “I wished we had more financial clients. Now I think it’s good we didn’t have as many.”
Despite their brave faces and resolute insistence that revenue won’t decline, firm leaders admitted that they’re leery of putting too much faith in the recent past. Hunton & Williams managing partner Walfrido “Wally” Martinez says his firm came off a profitable first half in 2008, in part because it made some serious cuts on the expense side of the balance sheet. But Martinez won’t say that’s a harbinger of good times. “In this economy what you say after having a strong first half is that you just had a strong six months,” he says. “There’s really a lack of clarity.”
The inability to gauge the future has also created a dramatic shift in firm leaders’ predictions of profitability. For the first time since we launched this survey in 2003, a majority of firm leaders–78 percent–reported that they do not expect profits per partner to grow by more than 5 percent next year. A sizable chunk, 43 percent, expect growth of a few percentage points, but an unprecedented 35 percent of managing partners predict profits will decrease or stay flat in 2009. And even those predictions, says Cravath, Swaine & Moore presiding partner Evan Chesler, are premature in such a volatile market.