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Our goal is to provide our assessment of, as well as third party information regarding, overall hiring trends in the legal marketplace, and to link to recent articles providing detailed analyses and updates.
Law Firms | Government and Public Interest | Law School Applications | Diversity
Summary
At the beginning of 2010, we remain amidst a period of declining law firm revenue, but are experiencing stabilization in the demand for legal services. We continue to see growth in certain practice areas, particularly restructuring and litigation, though not at a level sufficient to entirely offset declines in various corporate practice groups. Firms have taken a conservative approach to the weakened economy, including aggressively managing expenses through reduced hiring, attorney and staff layoffs, and even closing offices. The prior year was one of decline and leveling off, with indications that in 2010 we may experience the beginning of the recovery.
Legal Services
Government data preceding the current economic crisis indicated an annual trend of legal services output increasing at a greater rate than the GDP, particularly for the AmLaw 200 law firms (click here for a graph showing consistent growth in legal services output from 2000- 2007). Data for 2008 and 2009 is not yet available, so it is unclear how the economic decline affected this relationship. However, we do know that the legal industry was negatively impacted. The Hildebrandt International Peer Monitor Index shows flat demand for legal services over the first nine months of 2009. While demand during Q3 2009 was down 5.8% compared to Q3 2008, there are indications of demand growth stabilization, a positive sign for future quarters. A recent Wachovia Legal Services Group Survey found gross law firm revenue fell by 6.9% and net income by 6.1% through Q3 2009, as compared to the prior year.
Geography
The demand for legal services has varied across the nation, with many markets moving up to flat or positive growth. Chicago had a 2.4% increase in demand growth in Q3, and New York, San Francisco and Washington, D.C., were virtually flat in this area after several negative quarters. However, Silicon Valley (-1%) and Philadelphia (-3%) continued to have negative demand growth. Internationally, several European markets, including London, experienced slight positive growth, as well.
Practice Areas
As the economy continues to adjust to last year’s downturn, transactional work has suffered. Areas hardest hit include M&A (-8%), general corporate (-9%), real estate (-13%) and capital markets (-14%). However, restructuring (up 18% in activity in Q3 2009) remains strong and growth has been experienced in litigation practices (+1.8%), as well. IP litigation was down at the start of the year but demand has risen in recent months, leaving year-to-date growth flat.
In light of shifts in the demand for legal work, existing and new work is available. Areas in which law firm leaders expect to see the most revenue growth in 2010 are litigation and restructuring. It is believed that the Build America Bonds arising out of the stimulus package will lead to new bond work, as well as ancillary work connected to bond-related building projects. Similarly, as new regulations are approved, related work will grow within the law firms.
Attorney Hiring
The market for attorneys has slowed in reaction to the economy, impacting entry-level and lateral hiring. In a recent survey of law firm leaders, 46% expected to their firm to increase in size in 2010, compared to 72% in 2009; 42% of respondents expected their firm size to remain the same. Total partner headcount at the NLJ 250 firms was up less than 1% in 2009, a significant decline compared to recent years, but an indication that even in a down economy, firms were not willing to let their largest contributors go. However, about 10% of staff attorneys, of counsel, and similarly situated attorneys in NLJ 250 firms were cut in 2009.
Staff Reductions
Attorney and staff reductions remain common, though they slowed as 2009 progressed. At the onset of the economic downturn, layoffs and office closings tended to be in locations most closely tied to financial markets, particularly New York and Charlotte. Recent layoffs have hit almost every substantial legal market, and national and international firms have seen the layoffs spread across almost all offices.It is estimated that since November 2008, over 42,000 U.S. legal sector jobs have been lost. Seasonally adjusted U.S. Department of Labor statistics show substantial Q4 2009 layoffs, including 5800 in October, 2900 in November, and 2100 in December. In the U.S., it is estimated that the total number of employed attorneys declined by 7,000 in 2008, and over 4,000 attorneys at the nation’s largest law firms lost their jobs in 2009. It is reported that 25% of the UK's largest law firms have or are considering layoffs by the end of 2009.
In 2009, the NLJ 250 firms lost 4% of their attorneys, the largest decrease in the NLJ 250 in its 32 years of existence. The impact varied across major markets, with New York (-6.6%), Dallas (-5.9%), and Philadelphia (-5.6%), amongst the hardest hit. NLJ 250 firms in Chicago suffered a 4.1% reduction in size, while decreases in other markets, such as San Francisco (-3.9%), Los Angeles (-2.3%), and Washington, D.C. (-1.5%), were smaller. Major dissolutions since the economic downturn include Heller Ehrman, Thelen Reid Brown Raysman & Steiner, and Wolf Block.
Layoffs have not been confined to the U.S. Headcount in numerous international offices of NLJ 250 firms fell in 2009. Major declines include offices in London, Hong Kong and Bangkok. Most recently, Dubai has experienced attorney layoffs. UK-based firms also had their share of layoffs, with several Magic Circle each letting go of over 200 attorneys in 2009.
There is some positive news. A recent survey of AmLaw 200 law firm leaders indicated that only 4% thought it was likely that their firm would lay off associates in 2010, with 81% of respondents stating layoffs were unlikely.
Click here for a list of law firm layoffs.Lateral Hiring
With many law firms recently engaging in attorney reductions, associate hiring is somewhat stagnant. As the economy recovers, it is likely that the associate lateral market will pick up based upon practice area and need. Conversely, the partner lateral market is still active and individuals with large books of business remain marketable. A study found that during Q1 2009, almost 70% of lateral partner moves were from firms with higher profitability to firms with lower profitability. While the results may be skewed by a range of factors, they do suggest a trend away from focusing on Profits Per Partner (PPP) and towards other factors.Entry-Level and Summer Associate Hiring
Firms have begun considering new models for delivering client services, including moving away from a highly leveraged approach, such as from the traditional pyramid shape towards a diamond shape. Several firms have reported scaling back the size of their associate classes, and others have publicized their intent to offset smaller entry-level classes with the use of staff attorneys for large-scale projects. A recent survey of AmLaw 200 law firm leaders supports this movement, with 72% reporting that the 2010 first-year class will be smaller than the 2009 first-year class.
A common reaction to decreased workflow has been to push back start dates for the Class of 2009 anywhere from late-2009 to January 2011. Some firms have rescinded offers to incoming attorneys and others have offered deferral plans, including paying a decreased salary in exchange for working in public interest for a year and starting at the firm in late-2010. Approximately 60% of AmLaw 200 firms deferred start dates for the Class of 2009, and over 40% report a likelihood of deferrals for the Class of 2010. In a few instances, deferred associates have had their start date pushed back further, and at other firms, deferred associates have since had their offers revoked. Incoming associates, as well as those already at the firm, may find themselves working on matters outside of their primary practice group in the short-term.
During Fall 2008 recruiting, offers for 2009 summer associate positions fell by 33%, with offers from the nation's largest firms falling by almost 40%. That greatly exceeds what we experienced at Northwestern Law, where offers were down slightly. It is too early to accurately report on Fall 2009 recruiting, though initial indications show smaller law school OCI programs, with a number of firms cutting summer programs entirely and others delaying recruiting to later in the school year. Over 70% of AmLaw 200 firms reported that summer 2010 programs will be smaller in size than the prior year; it is believed these reductions may be by as much as 33%. Mid-sized firms continue to focus more on recruiting new lawyers from local schools and in many cases have limited visits to schools within their geographic region.Apprenticeships
In 2009 we saw more firms institute apprenticeships for integrating new attorneys. The programs vary from firm-to-firm, but the general concept involves hiring recent graduates at a reduced salary for a set period of time (ranging from six months to two years), during which they take classes, shadow firm attorneys, and handle pro bono matters. In so doing, practical legal skills are built with little time billed to clients. Ford & Harrison was a leader in instituting such a system, and they have since been joined others, including Drinker Biddle & Reath, Frost Brown & Todd, Strasburger & Price, and most recently, Howrey.Compensation
In the last twelve months, a number of the nation's largest law firms made changes to their compensation systems. Nonetheless, there remains a large disparity in attorney salaries, especially for entry-level attorneys. A NALP study revealed that for the Class of 2008, the median salary was approximately $72,000, though the bulk of recent graduates were grouped in two distinct ranges: nearly 42% fell within the $40,000 – $60,000 range and roughly 23% reported a starting salary of $160,000 (representing recent graduates employed at the nation's largest firms). Only 3% had a salary near the $92,000 mean.
For several years, entry-level salaries at the largest firms were almost consistently set at $160,000 in major markets. Firms have now begun cutting starting salaries, often times by as much as 10%. It is unclear how widespread reductions will be, but it is likely that many more will retreat towards $145,000 in major markets, with those instituting apprenticeship-like programs (see above) making even deeper cuts. Large firms in non-major markets tend to start attorneys in the $90,000 - $125,000 range and may also see reductions. A survey of AmLaw 200 firms revealed that 40% have reduced starting associate pay and 44% are considering such cuts. Overall, the salaries at the largest firms put financial pressure on mid-sized firms, but such pressure may not be as significant as in the past.
Compensation changes have not been limited to entry-level associates, as a number of firms have reduced or eliminated bonuses, frozen or cut associates salaries at all levels, and some have even cut partner (equity and non-equity) pay, as well. The extent to which cuts have been made is unclear, though this has not been confined to just mid-sized and regional firms, as evidenced by cuts at AmLaw top 10 firms Baker & McKenzie and Greenberg Traurig. An increasing number of firms also have moved away from lockstep associate compensation towards competency-based systems. Over 50% of AmLaw 200 firms reported instituting competency-based systems in 2009. At the partner level, despite revenue per lawyer remaining relatively stable, the overwhelming majority of the AmLaw 200 experienced a decrease in profits per partner in 2008, many experiencing a double digit decline. In is expected that 2009 year-end totals will also reflect declines in PPP.
Law Firms
Through 2009 proved to be challenging to firms of all sizes, some of the nation's largest firms have been hit the hardest. A Citi Private Bank survey of 133 law firm managing partners/chairman provided some positive news, such as an expectation of a stable or improving economy over the next six months, but the overall picture was largely grim. Most anticipate layoffs, with nearly 33% expecting to cut non-equity attorneys and 25% predicting a decline in equity partnership. Due to a focus on limited practice areas, lower overhead, and flexibility in working with clients to reduce expenses, smaller and boutique firms may be positioned well for adapting to changes in the legal market.
In light of financial stresses, firms have been good at limiting expenses. Through Q3 2009, direct expenses were down 4% compared to 2008, and overhead expenses were down 2.5%. Delays in technology upgrades and staffing changes to adjust for declining productivity and demand have helped offset decreased revenues.
Law firm mergers in 2009 remained largely consistent with recent years, as did global expansion, particularly in Asian and Middle Eastern markets. Depending on whether mergers were counted when announced (Altman Weil’s Mergerline) or completed (Hildebrandt), total 2009 mergers were either down 24% or up 4%. Most mergers were between firms smaller in size seeking to diversify based upon practice or geography, with very few mergers between two large firms. In Chicago, Bell Boyd & Lloyd merged with K&L Gates and Schuyler Roche grew its litigation practice by merging with Crisham & Kubes. (For updated information on law firm mergers, we highly recommend Altman Weil's Mergerline).
In the face of client demands for cost containment and increased efficiency, it is still too early to proclaim the death of the billable hour. Firms are showing more openness to considering fixed fees, contingency fees, and other alternative billing arrangements, typically on a matter-by-matter basis. Sweeping change has not been realized, though a survey of 587 general counsel and chief legal officers found that almost 40% paid more money in 2009 to law firms under alternative fee arrangements than in 2008. The survey also revealed that nearly 50% of respondents had paid a flat fee for at least one entire matter in 2009, with 36% having paid a flat fee for at least stages of a matter. A related survey of law firm leaders indicated that 82% had used a flat fee for at least one entire matter, and 75% had utilized incentive or success fees. It is likely that alternative fee arrangements will become even more common in 2010, though the predictability of and familiarity with hourly billing suggest that law firms and clients alike will continue to primarily rely on the billable hour in most instances.
A recent Hildebrandt survey of corporate law departments indicated ways which corporations are seeking to contain costs, including alternative fee arrangements (55% of respondents have or will implement alternative fee arrangements and 27% are considering such a move), rate freezes (64% have implemented or will implement with outside counsel), and rate reductions (46% have implemented or will implement with outside counsel). Despite the above, law firm billing rates still rose by 2.5% in 2009; for comparative purposes, fees rose 4.3% in 2008. A recent Altman Weil survey revealed that over 90% of respondents (all at law firms of at least 50 attorneys) planned on raising rates on average 3.2% in 2010.
Though it is hard to predict whether the economic downturn will have a lasting impact on how law firms function, an Altman Weil survey is revealing of potential permanent and temporary changes. The 208 survey respondents highlighted four areas where permanent change is likely: (1) increased price competition, (2) lengthened partnership track, (3) increased use of contract attorneys, and (4) alternative client-billing options. While in the aggregate respondents thought that changes in associate-partner leverage would be temporary, 40% of respondents with over 500 attorneys thought such changes would be permanent. Related, a survey of AmLaw 200 law firm leaders found that while 56% of respondents felt that the economic downturn had fundamentally changed the legal marketplace, only 56% felt the downturn would result in a fundamental shift in their own firm’s business model.
What we are likely to see in the coming years is large law firms moving from a "one size fits all" structure towards fine tuning internal structures to best meet individual firm needs. Leveraging, compensation, staffing, entry-level hiring, and billing structures may vary more greatly from firm-to-firm as profitability is maximized on an individual basis; a significant change from recent years in which often times firms simply tried to emulate what the most profitable firms were doing.
Government and Public Interest
While federal government lateral hiring will likely increase in 2010, presently all entry-level hiring, which is conducted through the Honors program, remains stable. State and local government hiring is largely frozen due to stress related to decreased tax revenues. Entry-level public interest hiring is down. Legal Aid across the country has been hit particularly hard due to decreased IOLTA funds. Because of the large number of attorney layoffs and deferrals, volunteerism at public interest employers increased in 2009; while positive for the public sector overall, this has resulted in fewer permanent opportunities for graduates seeking public interest careers. Several firms have offered to pay recently laid off attorneys and/or deferred incoming associates reduced salaries to work in public interest placements for specified periods of time (typically 9 - 12 months).
Law School Applications
Law school applications have increased nationally by approximately 9% for 2009, following a slow and steady decline from 2005-2008, and law schools class sizes remain relatively stable. For 2010, early indications are that applications will remain level, despite the fact that the number of LSAT test-takers were up 12% in June and 19% in October.
Diversity
The overall percentage of ethnic minorities in the 252 largest U.S. firms rose from 13.4% in 2007 to 13.9% in 2008 according to The Minority Law Journal's 2009 Diversity Scorecard. The percentage of minority partners improved incrementally, as well, up to 6.6% in 2008 from 6.2% in 2007. There was also a slight increase in the percentage of newly promoted partners that are minority lawyers (from 13.3% in 2007 to 13.8% in 2008), but minority lawyers made up a smaller proportion of lateral partner hires (from 11% in 2006 to 9.6% in 2008).
Wilson Sonsini Goodrich & Rosati received the highest diversity score (42.5) and boasts the third highest percentage of minority attorneys (25.5%). The current Diversity Scorecard rankings are based upon a revised formula giving greater weight to minority lawyers in senior positions. The individual law firm with the highest percentage of minority attorneys was Lewis Brisbois (26.3%), the firm with highest percentage of minority partners was Curtis Mallet-Prevost, Colt & Mosle (18.5%), and Greenberg Traurig reported the highest total number of minority partners (79). Irell & Manella had the highest percentage of openly gay and lesbian attorneys (8.4%) and Curtis Mallet-Prevost, Colt & Mosle had the highest percentage of disabled lawyers (2.0%).
Resources: American Lawyer, Altman Weil, Bureau of Economic Analysis, Bureau of Labor Statistics, Hildebrandt International, Hildebrandt International Peer Monitor Index, Legal Times, The Minority Law Journal, National Law Journal, NALP, New York Law Journal, New York Lawyer and Wachovia Legal Specialty Group.
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