From One Recession to Another: Reemerging Issues
As s law firms try to cope with the current recession, it may be helpful to remember that severe downturns are a recurring cycle of the economy—and they are always followed by extended periods of growth. That is as true for the legal profession as it is for the rest of the business world.
What’s noteworthy about recessions in the legal sector, though, is that many of the situations and trends that existed in one recession just continue or reappear in the next recession. Let’s compare today’s situation with that of the last major recession in the early 1990s.
Looking back. This was the situation and these were the major trends in the early 1990s. There was overcapacity in the profession. However, it gradually corrected itself as firms retrenched or dissolved, new laws were passed and new practice areas emerged.
- Despite the overcapacity, certain practice areas—and the firms that focused on them—were growing, including intellectual property, health care, employment law, technology and litigation practices.
- Certain other practice areas, in which services were routine and price was the only differentiating factor, were increasingly becoming commodities.
- Pressure from clients was leading to a push for alternative fee structures.
- Profits per partner declined, as did lawyer morale. The latter was a result of reduced income and pressure to work long hours and develop new business. As a result, some lawyers were leaving the profession.
- There was also a growing movement of lawyers among firms, like free agents in professional sports, with a resulting lack of loyalty for the long term.
- Merger was becoming a major strategy for firms that wanted to grow or that could not survive on their own.
- There was ambivalence about non-lawyer executives in law firms.
As a result, there was considerable uncertainty and turmoil, but good opportunities existed for firms that were innovative and flexible enough to adapt to the market.
Is this déjà vu? If the preceding sounds familiar, it should. Yes, there are also some new trends today but, with few exceptions, every one of the conditions just listed has continued or reappeared in this recession. So, what is the same? And what has changed?
Once again, there is overcapacity in firms, although this time it’s more severe. As a result, there have been more layoffs and more firm dissolutions. It’s likely that a greater number of lawyers, particularly associates and younger partners, will leave the profession. At the same time, however, the above practice areas have grown and firms that have focused on them—mostly smaller and midsize ones—are not only surviving but many are doing well. In addition, firms with more profitable practice areas continue to drop commodity practices, leaving such areas as workers’ compensation to firms with low-cost structures.
Client pressure for more value and alternative fee structures is also strong today, and has even increased, although the billable hour in one form or another still dominates.
And while profits per equity partner are down substantially in many firms, particularly large ones, most are improving (or is it “inflating”?) them by reducing the number of equity partners, either by “de-equitizing” them or having them leave the firm. “Free agency” continues, of course—in fact, it’s stronger than ever. And mergers continue, most of them by large firms acquiring smaller ones. There are few mergers of equals.
So what’s new? While the pressure to work longer hours continues in BigLaw environments, some firms are adapting to younger lawyers’ demands for a better quality of life by adopting new approaches such as lower required hours and part-time or flex-time schedules. Also, a greater number of firms have removed billable-hours requirements from their compensation systems.
Another notable shift is that the roles of the non-lawyer executive or manager have increased substantially, with the hiring of more chief operating officers, chief marketing officers, chief information officers and chief technology officers. A few firms now have diversity directors, too, with client demands for diversity in the firms they work with having increased.
Of course, there are some other major new trends affecting the profession today. Some of the most significant ones relate to the ongoing melting of borders between countries. We have the rise of international law firms with offices around the world, globalization of the practice by smaller firms through international networks and “strategic alliances,” and outsourcing of certain functions to firms and companies around the world.
Nonetheless, while new trends assuredly develop between recessions, it could also be said, based on the comparisons here, that “the more things change, the more they remain the same.”
About the Author
Bob Denney , President of Robert Denney Associates, Inc., has been providing strategic management and marketing counsel to law firms throughout North America for over 30 years, including through three prior recessions.