Law Review: After a few tough years, law firms are stabilizing

It would appear that all's quiet on the western front.

For law firms, the devastation that swept through the legal marketplace in 2008 and 2009 has come to an end. Layoffs have stopped or at least have been sharply curtailed, firms that suspended hiring are recruiting once again, and profits, though flat or down, have stabilized at numbers that would make average middle-class American wage earners click their heels with delight.

Even the sky-high starting salaries for first-year lawyers, long the source of client frustration and complaints, appear to have come through largely unscathed.

For evidence of this look no further than a survey by the National Association for Law Placement, which found that in the biggest legal markets the going rate for first-years was still at its prerecession high of $160,000 a year.

In Philadelphia, where law salaries are slightly lower than in New York, and Washington, and other top markets, the trend was the same. First-year salaries at big firms were unchanged from 2007, before the start of the Great Recession, ranging this year from a low of $125,000 to a high of $145,000.

"The real story on associate salaries is that they have been largely flat during the recession," said James Leipold, executive director of Washington-based NALP, and a resident of Philadelphia's Fairmount section.

So is it safe to conclude that the big-law-firm model has come through unscathed after the worst downturn since the Great Depression.

Well, actually, no.

Associate salaries and other compensation metrics don't come close to telling the story of changes under way in big law, say many of the profession's sharpest observers.

Leipold and other experts point out that while many law firms struggled to maintain high salaries for associates for fear that salary cuts might be seen as an economic distress signal, they've been slashing costs in other ways.

The layoffs of administrative staff and associates - non-partner lawyers - got plenty of attention last year.

Less well-known is the outsourcing of work overseas, and the layoffs of so-called compensation partners, lawyers who have achieved partnership rank but do not share in the profits of the firm.

"What the firms did when the recession hit is they laid off a lot of associates, and they found ways to terminate a number of partners who they thought were not productive enough," said Robert Reinstein, former dean of Temple Law School and a constitutional law professor there.

Leipold says he fears that layoffs of compensation partners - which tend to occur far more quietly than those involving associate lawyers, who feel no compunction about alerting legal blogs to the bad news - may continue and even intensify this year as firms push work down the law-firm hierarchy to less expensive and more profitable associates.

Meantime, while there has been a slight increase in mergers and acquisitions, most law firms are planning for another lean year.

"I don't get the sense that there is a huge uptick in legal services," said Thomas A. Decker, president and chief executive officer of Cozen O'Connor of Center City. "It's pretty flat. We believe we are going to bounce along at this level for a year or so and then slowly improve."

That revenue squeeze will force firms to change even more in the coming years, said Larry Ribstein, associate dean for research at the University of Illinois College of Law and an expert on law-firm management and economics.

Ribstein published a fascinating paper in the Wisconsin Law Review recently in which he argued that the changing economics of the legal industry were leading inexorably to the breakup of big firms.

Ribstein foresees a legal marketplace that still will have large firms, just fewer of them. Whole practice groups will splinter off, starting firms of their own as they seek refuge in smaller organizations with lower cost structures. This trend is already under way. Any number of third- and fourth-year associates in Philadelphia and around the country have left big firms, where their high chargeable rates didn't pass clients' laugh tests.

They've gone to smaller firms with lower cost structures where they can bill out their time at more modest rates.

At many firms in Philadelphia and around the country, the path to increased profitability has been through recruiting high-performing partners and associates from other firms, rather than nurturing homegrown talent, the traditional approach.

This is what Center City's Duane Morris L.L.P. and Cozen O'Connor did in picking up scores of partners from Wolf Block, after that firm's dissolution.

It's Ribstein's point that lateral recruiting, taken to an extreme, breaks down partnership cohesion, and undermines what he calls a firm's "reputational capital." When that happens, choosing a firm can be an eenie, meenie, miny mo, or throwing darts at a dart board.

Pick your metaphor.

The salient idea is that a law firm's image of unshakable competence and probity is what binds it to its clients. But how do you keep that if the players are constantly coming and going, particularly in the partnership ranks? It might then be just as rational to bring work in house than to assign it to an outside firm.

Given all these changes, why have first-year salaries retained their robustness?

"Good associates are still very valuable in this marketplace," Ribstein said. "We are getting more regulation than ever, and a sophisticated ability to grapple with that is more important than ever. The question is how many of them do you need. And the answer is not as many as before."