What the recession will bring

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My newest Law21 column is up at Slaw. Click the link to go read it, and then take some time to peruse all of Slaw’s other great posts and conversations at what Dennis Kennedy calls the best law blog in the business. As always, I’ll also post the article here.

“Are we looking at a second Depression? I don’t think so,” said Paul Krugman, NewYork Times columnist and Nobel-Prize-winning economist, during his luncheon address to the Canadian Corporate Counsel Association’s World Summit last week in Vancouver. Then he added: “A month ago, I would’ve said, ‘Absolutely not.’ But today, I’m going to say, ‘I don’t think so.’”

That was the standout quote for me from an economic assessment so pessimistic that at its end, Krugman admitted: “I wish I had some positive things to tell you.” But aside from, as he said, having “people in Washington I can now talk to,” he didn’t have much good news to share. The powerful tremors emanating from Citigroup add to worries that even an astonishing American stimulus package of $800,000,000,000 — a financial adrenalin shot roughly equal to Australia’s entire GDP — won’t cover even half of the expected $2,000,000,000,000 in losses this recession is pounding out. Every country’s economy is in trouble, and even those with the political will and financial tools to address the problems seem stymied. Europe is facing particular challenges, while China — whose financial statistics are “science fiction,” Krugman said — is facing a sharp downturn. He thinks the eventual solution to banks in crisis is going to be nationalization — though he observed that not even the Obama administration is psychologically ready to take that step yet.

Now, another Great Depression is still a considerable distance away (we’re nowhere near 25% unemployment, GDP cut in half, or a stock market reduced by 90%, for example). And since whatever the mainstream media brings you is pre-inflated at least 20% by hype, you could be forgiven for thinking that things are bad, certainly, but not borderline catastrophic. But while Krugman’s grim outlook took me aback, what really struck me was the lack of surprise among audience members, including a lot of general counsel and in-house lawyers from national and global entities. Some of them nodded in agreement and all of them seemed to have had their beliefs confirmed, not undermined, by his remarks. They had the air of people who know exactly how bad things might be.

Law firm lawyers should be concerned by that. They should also be concerned by this: for the most part, surprisingly little was said about the problem of outside counsel costs. This wasn’t because the problem had gone away; from my reading of comments on stage and in conversations, it was because legal costs had ceased to be something to talk about and had become something to be dealt with. The simplicity and finality of that sentiment were unnerving. I asked an in-house lawyer to name one thing her outside law firms could do to make her happier. “Reduce their costs,” she replied. Fair enough, I said; should they do it by outsourcing, or by automating, or by — she cut me off. “I don’t care,” she said flatly. (Patrick J. Lamb reports a similar experience.)

If these are the dark, heavy clouds of a major storm overhead, then the downpour is already hitting the ground. The steady stream of law firm layoffs at the end of 2008 has turned into a flood in the first month of 2009. Morrison & Foerster cut 53 lawyers and 148 staff; Wilson Sonsini dropped 45 lawyers and 68 staff; Cooley Godward laid off 52 lawyers and 62 staff; Blank Rome cut 20 lawyers and 40 staff. Baker & McKenzie laid off 20 people, Foley Hoag 32, and Morgan Lewis 50. Meanwhile, Clifford Chance’s global cuts are at 150 and Linklaters expects to drop up to 120 lawyers and 150 staff. Cadwalader continues to bleed. And don’t forget the firms that cut only or mostly staff. That’s about 1,500 reported layoffs in January, and more unreported — not all that many in a million-plus profession, perhaps, but still more than we’ve seen all at once in a long time.

Why the sudden paroxysm of cuts (with more certain to come)? Partly, the firms’ press releases speak truth: there is less work going around and there is overcapacity. But few firms have fallen so idle that a lack of work threatens their ability to meet payroll and keep the lights on; more often, the cuts are made to maintain overall profitability, just like in any other corporate venture. But don’t dismiss this as the old “greedy shareholders” story — there’s a strategic imperative here.

Firms need to keep their profitability up because they’re terrified that their most productive partners, believing their earning power is being diluted or dragged down by lesser performers, will abandon the firm for richer pastures. This “flight of the rainmakers,” as Dan Binstock calls it, is a real threat to firms’ viability: all it takes is a few key defections to trigger the kind of crisis of confidence that took down firms like Heller, Thelen and Thacher. Setting aside for a moment the question of what kind of “partner” bails on his colleagues in a crisis in order to make more money, this is the harsh reality facing a lot of firms, many of which must have concluded that cutting “less productive” staff, associates or even partners is an existential choice. It’s an urgent if not panicky maneuver, and it’s not going to work in all cases, because partners are on the move no matter what.

In the short term, the likely results will be the diminution or collapse of an unusual number of firms, and the brief emergence of “super” firms that went on buying and poaching sprees, added a lot of partner talent, and generally feasted on the remains of their failed rivals. Much will be made of these “winners,” whose leaders’ vision, aggressiveness and timeliness led their firms through the crisis bigger and better than when they went in. Eulogies will be written for the “losers,” heads shaken and tsks tsked at “victims of the recessi0n” that shuffled off this solvent coil. And many people will expect the script to end there and for things to go back to normal shortly thereafter.

But I’m not sure normal’s coming back that fast, if it comes back at all. As mentioned at the outset, this is going to be a hard downturn, not least because of its length. Krugman talked about a U-shaped recession as the upside, an L-shaped recession as the worse-case scenario; few people are talking about a V-shaped recession anymore. Accordingly, law firms can’t simply shed ballast for a few months and hope to ride out the storm; the brunt of this recession looks more and more likely to stretch into 2010, and could conceivably go longer. There just aren’t enough staff and associates, or even less-productive partners, to keep throwing overboard for that length of time. Firms will have to continually ward off those crises of confidence, and the longer this lasts and the more often a partner’s departure incites a death watch, the harder it’s going to be to hold the firm together. Those firms with strong cultures, true collegiality and rational business cultures will be fine; the other 90% are in for a very rough ride.

All recessions end, and eventually we’ll come out on the other side of this one too. But who’ll be there? There’ll be those super-firms I mentioned, at least one of which will be a true US-UK powerhouse with leading practices in both New York and London. I expect to see a lot more midsize firms, quite a few of which were formerly large outfits with multiple offices. But I think we’ll also see the start of a far more important transformation: the beginning of the end of the traditional law firm model.

That model, like the financial system upon which many of its users grew fat, has been pushed to its limits and is close to breakdown. Leverage is maxed out, and not just the financial kind that banks are unwilling or unable to extend for the foreseeable future. The ranks of associates can’t be swelled much larger than they were, and the billable hour targets for those associates can’t be pushed any higher, not unless firms start handing out human growth hormone to their new lawyers. The lack of professional management — part-time leaders with one eye always on their practices — is not sustainable for multi-million-dollar 21st-century businesses. Hourly billing is broken — neither the people billing the time nor the people paying the invoices can stand it any longer. Hiring straight-A law school graduates and hoping for the best is an irresponsible and indefensible way to manage talent and grow business. And so on.

The traditional law firm model, driven to its logical extreme, is busting its gears and jumping its track at the worst possible time: clients are ready to impose unilateral retainer conditions, competition from non-traditional law offices, non-lawyers and overseas lawyers is gathering steam, and technology that can automate, systematize and rationalize law firm cash cows like due diligence and document review is here. Take that powder keg — it would be a unique convergence of forces even in good times — and drop in the lighted match of an unprecedented global recession; the blast likely will transform the landscape of the private bar.

It seems to me that the traditional law firm model — designed to maximize profit and convenience for lawyers — is beginning its decline. Simultaneously, a new model — one designed to maximize service and efficiency for clients — is starting its rise. Richard Susskind’s new book (which will be reviewed here shortly) paints a vivid picture of an unbundled, pre-programmed, automated, systematized, packaged and downloaded future for legal services — a marketplace whose contours and functions are dictated by clients. That’s where we’re headed, and this recession will be a key early catalyst in getting us there.

This transformation won’t happen because lawyers suddenly see the light and come to realize the self-evident virtue of a client-centred law practice. It won’t happen because clients, especially the corporate kind, suddenly decide to be the change they’ve been pestering firms about for years. We’ve been waiting for these forces to trigger change on their own, and I think we can now call that watch off. All things being equal — which they’ve been for decades — the cloistered legal services marketplace keeps right on rolling. This change will happen because the realities of a badly wounded global economy will require it. The times really are changing, and despite its best efforts, the legal profession will change with it.

Speaking about the present crisis, the new US president told his country that it’s time for people to “put away childish things.” It’s also time, it seems to me, for the legal services marketplace to grow up.

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One Response to “What the recession will bring”

  1. Geoff Ketcheson

    Client focus is not just a slogan. Alternative business models based on that view, rather than firm profit and convenience, in the legal business are here, they’re working and they’re only going to get more popular, given the converging forces you note. Good post.
    GK

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