Thursday, May 21, 2009

Downturn in the legal market: temporary blip or end of an era?

An article in last week's Wall Street Journal Blog featured an interview with legal consultant Peter Zeughauser, who predicted a grim outlook for law firm hiring for the next few years:

It’s not going to be over before the end of the year. I think you’re going to see dramatically reduced offers to summer associates at the end of this summer, and dramatically reduced offers for people to come in as summers in 2010. These cuts could be very dramatic, as much as slashed by 90 percent.
This is just one of many recent blog posts and articles sounding the same note. The Fulton County Daily Report (via Law.com) says "It's Time to Face It: The Big Law Bubble Has Burst":
The Big Law bubble seemed like such a safe place. What better job security than working for a giant law firm with a diverse slate of clients, a reputation as a power house and enough billable hours for a willing Cog to propel herself via a series of 18-hour days straight through her youth and into the golden years? How could a firm with such lavish offices, premium pro-sports seating and historic origins be anything but a success through even the roughest of economic times?
Major law firms across the country are laying off staff--including partners, rescinding offers to law graduates, or paying as much as $60,000 to put them on furlough for a year. However, there is still no consensus on what all this means for the future: is this just a temporary downturn, and will the law firm market be "back to normal" in a couple of years, or is this a major structural shift such that the good times will never return?

A few law schools are tentatively responding. Some schools are strengthening their practical skills programs to make their students more competitive in a tight market; a few are experimenting with co-op or internship programs in the third year. In general, though, law schools seem to be tightening their belts for the short term but assuming that things will get all better before long.

On the other hand, some of those legal consultants arguing that the law firm market is undergoing a permanent realignment or paradigm shift, like many consultants, have a financial interest in promoting a crisis mentality--all the better to convince law firms to pay for their insight and guidance.

So what do we do? Plan to ride out a temporary downturn, or begin (if it's not already too late) intensive self-study and radical restructuring for a radically different law market for the next generation or two?

7 comments:

Greg Lambert said...

Good points, Jim. I've watched a number of folks toll the death knell for BigLaw over the past 9 months or so, and putting it in the context of a "BigLaw Bubble" is a very good analogy. When the "bubble" breaks in an overinflated industry, it doesn't necessarily mean that the underlying product (or concept) is flawed. It generally means that the expectations that a lot of people have in the industry are simply unrealistic. In this case, having 10% (or higher) increases in revenue each year, and pretending that every AmLaw 100 firm is a high-dollar NYC firm (and paying all of their attorneys like they are in the top-dollar market) just isn't an achievable goal for every BigLaw firm.

So, whether BigLaw can return to "normal" remains to be seen. BigLaw has its place for handling complex legal issues and will be needed by large corporations well into the future. However, there seems to be a strong need for those that run BigLaw to rethink how they earn money. Many point out that the "billable hour" puts a cap on the potential money that the firm can make. Asking people to work 2000 hours of 'billable' time and another 500-1000 of 'non-billable' time is, quite frankly, insane!

Now would be the time to rethink the overall structure of how BigLaw firms operate, and determine what will be the best new model to get them through the next 30 years. This is a "follow the leader" type of industry, so I'm guessing that a few trailblazing firms will find the next sustainable model, and then the others will quickly jump on the bandwagon.

Robert Richards said...

Jim:

Thanks for raising this important topic. As I wrote to Dean Wright on ALL-SIS listserv this week, I believe the contraction in the private legal services market is permanent: "[T]he private legal services market seems to be contracting, so that law firms and alumni will probably provide substantially less support to law schools for some time to come. (Large and medium-sized firms will probably give less [to law schools] due to lower profits; firms are downsizing, so that many more alums will have to work as solos or in small firms, with less to spare for support of the law school.) Law firm clients are demanding lower fees and more limited services, and are unlikely to accept the reverse in the future." Therefore I think U.S. law schools and law libraries will need to factor this into their strategic planning. Due to the legal services market contraction, the new emphasis on outcomes, the high cost of skills-based instruction, the persistence of junior law faculty with Ph.D.s requiring non-law-related research support, the weakening of accreditation standards for law libraries, and the damage to law school endowments, U.S. law schools will likely permanently reduce law library funding and space in the coming months and years. As I wrote on ALL-SIS listserv, in the coming months and years, "[a]cademic law libraries will probably be left to struggle to preserve personnel positions, using comparative advantage arguments. I think our legal training, advanced legal research skills, and specialized skills in areas such as licensing, information management, and particular types of technology will be key assets respecting those arguments."

Melania said...

interesting Jim. the legal industry is so far behind the times in terms of technology and trends. As if old school views are latched onto for dear life. The emerging law firms who are up to date with staff, technology and emerging trends may weather the storm and be able to shift their focus to new opportunities without too much disruption. It's the new grads coming out who expect that old school attitude and maybe even suffer from a little entitlement-itis who will suffer. The free thinking and ingenious grads will likely be paving the way and helping define new ways and approaches to operating business in this climate. I'm curious to see how they will come out of this economy and climate and what attitude and trend it may create.

David said...

I think the answer to your question is in between the extremes. Yes, this bubble has burst, or at least deflated substantially. And, just like the financial market that supported much of it, the deflation was inevitable and overdue. But to say that it is all over - that the legal profession is forever changed as of right now - it seems to me that is more overheated rhetoric. Probably (as you suggest) perpetuated by folks who have an interest in that outcome (or at least a fear of it).
To extend the bubble metaphor (probably to its bursting point): perhaps we should think of the legal profession as a pancake on a griddle. You know how many bubbles come up and eventually burst or deflate? I think we have a pancake that is going to take 20 years to cook. This is one of the first shocks to the system, but there will be more. It will just take a long time for the legal profession to be dramatically changed. And when it is over, the pancake will be "done" but it will still pretty much look like a pancake. The infrastructure of it (OK, here is where the pancake/bubble metaphor falls apart) will be what is different - and as you know, I think much of that infrastructure change will be driven and facilitated by technology - probably more than by economic forces alone, although economic forces often are a driver of adoption and integration of technology (so economics certainly deserves credit too).
So to answer the question in your headline: my view is that this is neither a temporary blip nor an end of an era. It is one of many "bubbles" - small and large - that will change the legal profession over the next 20 years or so. An important one, yes, but not some sort of 100 year earthquake that forever changes the landscape.

Robert Richards said...

Jordan Furlong has an interesting new post on this topic at SLAW: http://www.slaw.ca/2009/06/07/the-canary-in-our-coal-mine/

Robert Richards said...

Also, see Gina Passarella's latest article in her Legal Intelligencer series on "the lasting effects of the recession on the legal industry," "GCs Want Firms to Change With the Times," http://bit.ly/HeKQR : "Daniel J. DiLucchio Jr. of Altman Weil said every change in law departments is stemming from cost control, and many of the changes are fundamental and long-lasting." Previous articles in series are intermingled at http://bit.ly/BIlw6 .

Robert Richards said...

Here's some more data: In late June 2009, LexisNexis published the results of a survey, “Effects of the Current Economic Downturn on U.S. Law Departments,” available free of charge by registering at http://www.lexisnexis.com/study. Here is a BusinessWire summary of some of the report's key findings:

"The survey found that 98 percent of in-house law department executives agreed that the current economic environment has affected their departments, a number much higher than the 78 percent of respondents who reported an economic impact on their companies in the U.S. overall. In addition, more than 67 percent of respondents said they feel pressured to cut spending and 59 percent have already experienced a reduction in their department budget. Overall, an overwhelming 97 percent are adjusting their current practices to reduce costs." In addition, "six in 10 in-house law department executives are now asking their law firms for alternative billing arrangements."