The Big Chill
By Virginia Grant
CUTBACKS. Workforce realignment. Aggressive quality assessments. Natural attrition. Delayering. Cost cutting. They’re a few of the euphemisms law firms are using to soften the splurge of layoffs. After the hiring heat of the past few years, it’s suddenly chilly out there. Know who’s at risk and what firms can do to avoid layoffs.
The legal profession seemed to assume it was immune from larger economic trends—until the early 1990s, that is, when many law firms were forced to lay off associates and, ultimately, partners. Now, once again, the economy has turned downward. And the profession is caught in the crosshairs, just like the rest of the business world. If you believe lawyers’ jobs are safe from an economic cooldown, get over it.
Big-time lawyer layoffs are making headlines in the New York Times and flaming up the Greedy Associates Web site. But make no mistake about it. Unpaid sabbaticals, aggressive performance reviews, delayed start dates and paid offers to take public interest jobs are all cost-cutting maneuvers, too, initiated by firms to address an imbalance between excess lawyer capacity and reduced workloads. There are numerous examples of firms on both coasts cutting significant numbers of lawyers through aggressive performance reviews and other reduction strategies.
As the economy continues to stagnate well beyond a short-term lapse of work, more firms are being forced to rethink their workforce capacity. How did we get here? Who’s at risk of being frozen out? And what are the alternatives to lawyer layoffs?
What Brought This On?
From 1997 through the middle of 2000, law firms hired associates as fast as they could to keep up with the work influx. Firms boosted their corporate and intellectual property practices to respond to the boom in the major technology centers throughout the United States. For many such firms, it became a daily event to turn down high-quality, high-paying client work because they lacked available lawyers.
At the same time, these firms felt pressure from the growing number of dot-com companies that lured senior associates and junior partners away with promises of higher salaries, slower-paced environments and potentially valuable stock options. To improve retention, Silicon Valley law firms drastically increased lawyers’ starting salaries by $20,000 to $60,000. Law firms nationwide began to experience corresponding salary demands and responded by boosting their associate salaries as well.
This brings us to today. The economy has turned downward, a wealth of dot-com companies have faded, workloads have slowed, associates are scrambling to keep busy, and the near-term situation appears even worse after September 11. Law firms are now trying to figure out what to do with their high-priced lawyers and their fallen billables.
Who Is At Risk?
Firms are widely mixed in the assessment of their economic problems, how to address them and, most importantly, whether and who to cut.
Clearly, some firms and practice areas are more at risk than others. Firms that put all their eggs in the high-tech or venture capital industries are high on the list. In addition, intellectual property, corporate and transactional practice groups face certain difficulties in the months ahead. The majority of layoffs are hitting corporate lawyers across the country.
In some firms, part-time and temporary lawyers may also be at risk. Plus, lawyers on flex-time schedules could find themselves targeted. Likewise, contract lawyers may be in jeopardy.
In other firms, high-priced, highly specialized senior associates might be at greater risk than junior associates. Those who overspecialized during the bull market of the past five years will find it more difficult to transition into other practice areas than associates who are still in training stages.
Partners are not immune from layoffs, either. One of the most important lessons of the previous recession is that no reduction will more significantly affect bottom-line profits than the reduction of partners. It is clear that underproductive partners are being watched much more closely than before. That’s not surprising, coming so soon after a period of heavy demand that prompted many firms to promote more associates and non-equity partners than they would have otherwise.
The Recruitment Problem
Law firms compete not just for clients but for talent as well. The ability to recruit talented lawyers is as key to survival as attracting clients is. Consequently, some firms are opting to lay off lawyers within the firm rather than limit the incoming class of associates because they do not want to hinder future recruiting efforts.
Other firms have chosen to sacrifice their summer associate programs rather than their commitment and loyalty to current associates. Of course, that decision is also driven by economics, since more-senior associates tend to be more productive and profitable than new lawyers, who require significantly higher levels of supervision and suffer dramatically lower realization. This, though, has in turn upset many summer associates who devoted one or more of their summers to law firms only to find that no offers, or very few, will be extended. (According to the August 28, 2001, New York Law Journal, one New York firm that usually extends offers to more than 90 percent of summer associates gave offers to less than two-thirds of them.)
In a different trend, some law school administrators have noticed that firms are gravitating toward second-year students rather than those in their third-year, likely because firms are looking for lag time before they have to hire graduates as associates George Washington University reported that approximately 22 law firms backed out of on-campus interviewing in 2001 (including some of the nation’s largest firms).
Alternatives: Discretionary Expenses, Freezes and Start Dates
Many firms have devised alternatives to letting lawyers go without damaging future recruiting efforts. Some firms are cutting back on discretionary expenses such as travel, conferences, seminar attendance and firm retreats. Some have implemented freezes on salaries, bonuses and raises. Others are delaying or staggering associate start dates.
According to the National Law Journal (August 6, 2001), one major Boston-based firm will not raise salaries for the current class of associates beyond the base rate set in January 2001. Other examples include a San Francisco firm that has no plans to increase its associate starting salary and has delayed starting dates for incoming associates. One Silicon Valley firm that handles only venture capital and IPO work for technology companies told its 2001 associates not to report to work until January 2002. Another Silicon Valley firm is staggering starting dates for incoming associates. And yet another West Coast firm quietly announced to its associates that pay raises that normally take effect in January would be delayed six months as a means to keep everyone employed.
In addition, some firms are reassigning associates to different practice areas and reevaluating hiring targets. Two prominent law firms in the high-tech field have withheld bonuses, while others are offering unpaid sabbaticals. From the perspective of most lawyers, these unwelcome cutbacks are better than being laid off.
What to Do While Cooling Down
Faced with the challenge of declining economics, many firms have tough choices to confront. Some may be forced to let lawyers go, while others will have the option of taking more flexible roads to safeguard the bottom line. Regardless of the circumstances, firms should follow these rules of thumb:
▪ Don’t Hold Off On Giving Bad News. If by any estimate the year-end results will be much less than expected, tell your partners now. And tell them often. No matter how obvious it might be to you, most partners continue to hope for miracles at year-end and expect extraordinary income to materialize. Bad news doesn’t improve by delaying its delivery; it only gets worse.
▪ Avoid Following the Pack. Law firms tend to follow examples set by other firms. Yet that is hardly a reason to automatically jump on the layoff bandwagon when profits look bad. Firms must focus their attention on closely monitoring clients and the clients’ businesses. This will allow firms to better predict the direction of workloads and client demand.
▪ If You Must Lay Off Lawyers, Do It All At Once. Small cuts rarely have the desired economic impact. Moreover, small bites are not always easy to swallow. Layoffs significantly hurt morale and can destabilize the firm. Rather than putting the firm through this trauma several times, consider doing it all at once.
▪ Be Willing to Retrain in New Practice Areas. Firms may need to reallocated and redistribute work to keep their lawyers busy. More than ever, it will be vital for lawyers to show that they are open to learning new practice areas. Unfortunately, the history of lawyer re-tooling from one practice area to another is not stellar. The critical elements are the individual’s strong desire to get into the new practice; the firm’s realistic assessment of the time involved to re-tool (six months to two years, at a minimum); and a willingness to make adjustments in compensation to reflect changing economics.
▪ Take Care to Avoid Internal Strife. The lack of work or the perception of financial turmoil can heighten sensitivities. Lawyers might begin to direct their frustrations inward by attacking personnel, firm policies and so on. Law firms should increase intrafirm communication by encouraging practice and other groups to meet often. This provides an opportunity for lawyers to speak openly about declining workloads and to seek assistance through the firm’s marketing and cross-selling programs. More importantly, it is an opportunity for firm management to keep everyone informed about the firm’s economics.
Here’s the real bottom line: Firms that are aware of their vulnerabilities and are properly prepared to make adjustments during difficult economic times will be better positioned to handle whatever challenges the profession confronts, not just now, but in the future, too. ■
VIRGINIA GRANT ( email@example.com) is a consultant with Altman Weil, Inc. in Milwaukee,WI. Contact her at (414) 427-5400.
COLD REALITY: MANAGING RECRUITMENT AND RETENTION IN A DOWNTURN
How you lead your firm through a faltering economy may be the true and best test of character and skill—a test that may be toughest when it comes to making employment decisions. A new report by the National Association of Law Placement’s Foundation for Law Career Research and Education aims to provide insight into the pragmatic business, policy and philosophical issues that firms face in an economic downturn. Managing Law Firm Recruitment and Retention in a Downturn offers a blueprint for how to manage present lawyer capacity and plan for the future; how to manage a reduction in workforce; and how to look beyond the downturn to rebuilding the firm and its morale. Throughout, the paper advises firms to plan for the long term and sustain the ability to recruit and hire new lawyers. But the paper excels at nuts-and-bolts advice on the termination process, with sample checklists and documents for exit management.
ASSETS OR LIABILITIES?
CHECKLIST FOR MANAGING A REDUCTION IN FORCE
The law firm layoffs in the early ’90s served up plenty of nasty examples of the wrong way to "rightsize" a law firm.The process—when there was one—simply broke down.Granted, there is no easy or pleasant way to terminate an employee, especially when performance is not a factor. But approaching decisions from the position that human resources are assets rather than liabilities will help ensure a more positive experience. Above all, cautions the report, follow a process and take extreme care with every step.
• Form and use a diverse, high-level downsizing committee.
• Review contractual obligations between the firm and employees.
• Carefully apply standards or criteria for selection of employees for termination.
• Use critical analyses, checks and balances on selection processes to ensure fairness.
• Deliver a consistent message when notifying employees of termination.
• Predetermine the availability of termination alternatives such as voluntary separation, stays or redeployment.
• Prepare and require execution of separation agreements.
• Plan for appropriate extension of compensation, severance and benefits packages.
• Provide counseling, outplacement and EAP services as needed.
• Consider and plan for necessary levels of confidentiality.
• Implement a uniform policy for referrals and references.
• Create a plan to manage exits of both friendly and hostile terminated employees.
• Coordinate a strategy for management of information and media interaction on the layoff process.
The report is available from the NALP Foundation, (202) 835-1001,www.nalp.org.