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Wednesday, July 15, 2009
Partners in the Law Firm Market Downturn
If you read just about any law journal or Above the Law, you know that associates in big law firms have experienced the brunt of the downturn in the market for law firm services. Associates have been fired, suffered cuts in their compensation, and have seen their start dates deferred. Law students -- the future associates of law firms -- also have been harmed insofar as law firms have announced reductions or outright cancellations of future summer recruiting classes for 2010.
So it's fair to ask, then, what about the partners? If the law firms don't have enough work to go around, the firm doesn't need so many partners, right? Why have we not heard about large scale partnership reductions?
Now, it might be that partners are suffering their own cuts, but that firms are not announcing those cuts the way they announce associate and staff terminations. For a number of reasons, firms have little choice but to announce large scale layoffs (because if they don't, Above the Law and other blogs will rightly do it for them), but partners have more incentive to keep quiet.
Alternately, the silence about partner firings could simply be a reflection of the fact partners really are much safer than associates, either because partners are more valuable to firms (sorry, I don't really buy that one either), or because they have the power to terminate everyone else before they look inward.
Which option is it?
Originally, I assumed the former scenario (that partners were suffering, but suffering more quietly than associates). I figured that rainmaker partners within the practices that were still lucrative would demand that the firm get rid of the deadweight partners or suffer the consequences (ie, that the rainmakers would take their business elsewhere). Why should the booming bankruptcy practice carry the backs of the M&A partners with nothing to do?
Then it occurred to me that perhaps this would not be the case because, in this market, rainmakers might feel risk averse about leaving their own firm for another firm. Rainmakers might distrust the information they receive from recruiting firms, and in a market like this, the costs of a mistake are pretty high. Better to stick with the frying pan than to jump into the fire. So, rainmakers may be staying put, and perhaps planning to leave when the market gets better.
But that brings me back to the deadweight partners. What's happening to them? If the rainmakers stay put, is there any incentive to trim the partner ranks? Or will firms decimate their associate ranks before they start thinking about their bloated managerial ranks?
Posted by Miriam Baer on July 15, 2009 at 06:19 PM | Permalink
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Comments
Multiple answers.
1. Partners are more than managerial, they are production staff. Relatively few lawyers in large firms devote significant time to managerial duties. Partners make up about a quarter of the lawyers, even at the largest firms, and nearly half of lawyers at smaller ones.
Above the Law and others have reported that clients are insisting that a larger share of their work be done by partners, because they are not willing to pay less skilled associates billed at high hourly rates to do the work. Firms with lower partner to associate ratios have had fewer associate layoffs.
Even rainmakers must constantly devote time to the fundamentally legal task of maintain a relationship with a client.
2. Partners, collectively, automatically and by definition receive paycuts whenever the firm becomes less profitable.
There is a tradeoff between flexible compensation and job security.
There is also a recognition among partners that all of them were elevated to partner status because they showed themselves to be hardworking and productive for many years, and that today's "deadweight partner" due simply to a market downturn in a specialty, may be tomorrow's hot commodity.
3. Some firms deal with "deadweight" partners in their compensation plans which allocate profits fully or in part, based upon the number of billable hours that a partner produces. Billable hour requirements for partners in large law firms are also considerably more common than is widely known.
In many larger firms there are one or more layers of "non-equity" partners who are essential "Of Counsel" contract lawyers with a better title, who receive pay based upon the work they do personally, the work that they personally supervise, and the work that they bring to the firm. The firm itself takes a cut of the gross for operating expenses.
Most large firms are so profitable in normal times, that they can cover their operating expenses from this percentage, even when work is slack. A firm with pre-crash profits per partner of $800,000 that fires associates and staff to deal with declining demand can see a big drop in profits before it starts losing money on overhead paid to support non-equity partners.
A quiet way to deal with a "deadweight partner" with equity status is to demote that partner to non-equity status. No press releases or announcements are required, no office relocations need be made, no stationary need be reprinted and no website biographies need be tweaked. The partner simply starts to receive pay that is no longer includes a part of the firm's profits. A little overhead devoted to a "deadweight partner" who isn't receiving a part of the profits and is doing some work is a pretty modest expense.
Partners with economically health practices for which they aren't receiving their fair share of compensation routinely jump to "higher up the foodchain" firms through lateral hiring. Partners who are snubbed with non-equity status that they feel undercompensates them are easy to lure away with lateral hire offers that still pay less than they would have made as full equity partners at the firm they left.
In short, pay issues often produce voluntary departures so that layoffs are not necessary.
4. Several prominent law firms have gone out of business in dramatic implosions. In one headline making case, a key factor that kept the firm from merging to save itself, and one that also kept many partners in the firm long after it ceased to make current economic sense to do so, was a large, non-qualified deferred compensation plan that was a major liability to acquiring firms and a major asset to partners who decided to stay.
5. Old partners die or retire or become "Of Counsel". One can reduce partner ranks simply by not promoting new people in low demand practices to partner rank. Promotion opportunities are few and far between for M&A associates with seven years experience who don't speak Mandarin, no matter how good their work has been in the past.
Posted by: ohwilleke | Jul 15, 2009 9:52:00 PM
deadweight partners have been get cut left and right. weak partners are being moved to non-equity. would-be-equity-partners are being stalled in non-equity status until economics are stronger. and partners are making less money if their economics are soft.
Posted by: yui | Jul 15, 2009 10:09:45 PM
Thanks for the replies. From both of your comments, it would seem that deadweight partners have been hurt, at least insofar as they have been demoted to non-equity positions. But, unlike the associate layoffs, which the firms themselves report in press releases, the partnership demotions and layoffs are much quieter. I wonder if we are looking too intently at associate layoffs to judge what is happening to firms. Without knowing what a firm is doing with its partner ranis, it seems impossible to judge the health of these firms as we move forward.
Posted by: miriam baer | Jul 15, 2009 10:27:25 PM
I do await the partner layoff tracker.
Posted by: David | Jul 16, 2009 1:13:52 AM
read "the elastic tournament." the core and the mantle are treated very differently.
Posted by: yui | Jul 16, 2009 1:55:44 AM
