For law firms, there was fear that this particular downturn was not cyclical as had been the case with previous downturns. Previously, as the economy has ebbed and flowed, a downturn in some practice areas would be offset by an uptick in others. A dip for transactional lawyers has typically been accompanied by an uptick in litigation, bankruptcy or employment. But in early 2020, firm leaders were concerned that this pattern would not hold true in such an unprecedented crisis, with corporate clients reluctant to retain outside firms during the corporate belt-tightening, or more troublesome, that the work would come in but clients would be unable to pay. Law firms faced a dreaded combination of less work and slow collections, which threatened a significant cash flow crisis, with no useful crystal ball to see into the future.
To compound the problem, the early 2020 timing of the onset of the crisis was particularly bad. Unlike other businesses, many law firms don’t keep substantial reserves, relying on their lines of credit for unexpected bumps in the road. Money comes in and is paid out in expenses and distributions to equity partners. The coffers then remain empty until repleted. For those firms with a fiscal year ending in December, coffers were still largely empty when the crisis hit. Even those firms with fiscal years ending in April may have initially perceived this crisis as a short-term problem and paid out funds as usual.
Reducing Overheard and Cutting Expenses
Law firms responded to their current or anticipated cash flow crisis as one would expect, by frantically searching for ways to stem the outflow—cutting expenses and reducing overhead. The ability to cut expenses by reducing space was limited by pesky long-term leases. That left personnel as the largest category of overhead that could be cut. Cutting personnel would mean cutting staff, but also associates and non-equity partners.
Cutting expenses by letting go of associates and non-equity partners during downturns has not traditionally been an option exercised by law firms. Up until the subprime mortgage crises and the 2007-09 downturn, when law business was bad, law firm management didn’t cut the pay of their associates or cut associates themselves. There was a general fear that, if a law firm took such actions, people would notice and think the firm was in trouble or not treating its people well, and that perception could have bad recruiting repercussions. Firms still wanted to show off their bright shiny pennies coming out of law school or through lateral recruitment. Then along came 2007-09, perceived at the time as “The Big One.” Law firms were impelled to make deeper cuts than those in the past, and some crossed the line into the associate ranks.
Initially, the cuts were made incrementally and without much notice. Pay cuts were made, rather than outright layoffs, and then firms cut the numbers to be hired in incoming classes. Still, there were too many mouths to feed, and law firms had to make the hard choice of making layoffs. To bypass the traditional concern that people would perceive these layoffs as indication of the firms’ struggles, some spun the layoffs as performance-based—a double whammy for affected associates.
Some may note that, whether it was described as such or not, any layoffs would be perceived as performance-based—that the best employees wouldn’t be the first ones to be terminated. But, while true in most other industries, in law firms, who succeeds is in large part, luck of the draw. The expendability of an associate is in part dependent upon how much business their specific “group” or specialty practice enjoys at the given moment.
So, the new paradigm after 2009 was that pay cuts and layoffs were no longer off the table for the legal industry. As a result of that paradigm shift, when the pandemic struck in 2020, without much of a blink, the legal industry saw pay cuts, furloughs and layoffs. Law firms immediately went into full retrenchment mode with little or no focus on the impact on recruiting and the ability to attract lawyers. There were already too many mouths to feed.
A Changing Landscape
But, as 2020 progressed, the threat of the pandemic became less opaque. By early fall, while the legal industry still didn’t know when it would see the end of the virus and its effects on clients, law firms had a better grasp of the effect on their workflow and cash flow. Law firms were living in the crystal ball future that they had been straining to see since the preceding spring. There would have been much less terror if law firms in spring 2020 could have seen what the law firm world would look like in fall 2020.
Their worst fears, by and large, didn’t pan out. Litigation, bankruptcy and employment played their customary role as the counter to less work in M&A, intellectual property, real estate and the like. The fear that general counsels wouldn’t outsource work or pursue litigation if their companies were cash strapped didn’t play out to the extent anticipated and was mitigated by litigation funders willing to front litigation costs. Firms were getting their arms around the effect of the crisis and, in many cases, enjoying strong financial performance.
As a result, firms began the rollback of some of their COVID measures—fine-tuning their drastic stabs at cost cutting. Firms began restoring associates to or near pre-COVID-cut pay levels—some not only restoring salary cuts to pre-pandemic levels but making associates whole by paying them the amounts they lost over those months following the cuts. Firm bonuses returned, with some firms paying their customary year-end bonuses, or some version of them, and some giving out special pandemic bonuses in appreciation of work done during the pandemic.
Many firms that reacted to the 2020 pandemic by making cuts in the workforce came to realize, as the volume of work and collections did not drop as feared, that they suddenly didn’t have enough bodies to handle their workload. Hence, recruiting efforts ramped back up, often aimed at experienced lawyers who could handle areas that expanded during the pandemic, the traditional cyclical areas such litigation, employment and bankruptcy as well health care and insurance coverage. Accordingly, focus returned to making firms attractive for lawyers graduating into the workforce and those seeking to make a lateral move.
Recruiting and Competition
As the recruiting wars ramped back up, so did the competition for the best and brightest talent available. In BigLaw, Davis Polk stepped out first, offering pandemic bonuses from $7,500 for the class of 2019 up to $40,000 for the class of 2013. And many other large firms, such as Sullivan & Cromwell, Weil, Gotshal & Manges, Debevoise & Plimpton, Latham & Watkins, and Milbank rapidly fell in line.
However, the law firm reaction to the pandemic changed the landscape of how potential laterals, as well as current firm legal personnel, evaluate firms they are looking at or already working in—not simply making an analysis on the basis of who was paying the biggest pandemic bonus. In addition to sizing up firms by the old metrics—comparing the likes of comp and bonuses, assigned practice group, partnership prospects—there emerged a few more points of comparison.
Potential recruits and current lawyers are now concerned with whether an employer or potential employer has emerged as a “good guy” or “bad guy.” And, that barometer is not necessarily a measure of whether firms implemented cuts, even cutting salaries or instituting furloughs. The smart potential firm lawyer would hope that the firm would react in a business-smart way. The differentiator for many potential recruits and potential firm defectors is an analysis of the different ways firms instituted the cost cuts as well as the restorations. How fairly were the cuts allotted? Did the partners shoulder their share? How transparent was firm leadership? What assistance was given to lawyers working remotely? The answers to these questions may provide a window into the intrinsic nature of the firm itself and its values.
Moreover, the focus on these issues may present opportunities for smaller firms, with a healthy business climate and culture, to compete for top talent that was previously thought to be unreachable. Candidates may find the more intimate structure of smaller firms to be an attractive safeguard against future economic downturns.
The impact of the COVID-19 pandemic upon the practice of law and the recruitment of lawyers continues to play out. The landscape continues to shift as law firms and candidates assess what is most important to them. We do know that the legal industry didn’t collapse, as some feared. We also understand more about the impact than we ever did, and learn more each day. Perhaps, most importantly, we see an end in sight, which will lead to a stabilization of the landscape, whatever that new landscape may be.