"Business of Law" Survey Paints Mixed Picture of Legal Market
by Cullen Couch
A mid-summer online survey of UVA Law alumni shows that the economic downturn is clouding the business and culture of the nation’s law firms and in-house legal departments. Its intensity depends largely on the size of the firm or company, and to a lesser degree the size of the city in which the firm or company is based. National and international firms are faring worse than their local and regional counterparts, and publicly-traded entities are struggling more than privately-held companies and non-profits. Over 95% of all legal employment sectors report moderate to severe impacts.
Traditional Hourly Rate Still Dominates
Although national and international firms report that clients have begun renegotiating fee arrangements and demanding discounts, the traditional hourly rate structure remains dominant in law firms of all sizes and locations.
“The hourly rate, for all its faults, does provide a measure of the difficulty and effort required,” says a respondent from a national firm in a large metro area. “It provides a good standard for pricing services, particularly on the defense side.” However, the respondent also notes that “on the plaintiff side, where litigation is designed to create new wealth for a client, there is a greater opportunity to vary from the hourly rate.” An international firm reports that it is “doing away with block billing” and offering something akin to “a hotel approach where you pay for X number of rooms for Y number of nights and get an overall discount off the rate for the rooms.”
Smaller firms seem to feel less pressure on fees, possibly because of greater competitive stability in smaller markets. “Our clients compare our rates to those of the national firms and know that they are getting a bargain, and have told us so,” says a regional firm. Another regional firm respondent agrees, reporting that “[w]e have turned away more prospective clients and argued more and more why we should be allowed to be paid for work done.” But a small firm attorney admits that the firm is “willing to entertain alternative rate structures” as needed.
On the client side, corporate counsel continue grudgingly to accept the hourly rate structure. Although 55% say they are looking for set fee arrangements to replace hourly rates, over 90% of them report that they still use hourly billing arrangements with outside counsel but are seeking lower billable rates.
Even with those few who are experimenting with alternative fee arrangements, the hourly rate still resonates. “We negotiated a flat blended rate with one firm, a discount with another firm, a set fee by job, and have still paid hourly rates,” says one respondent in a privately held company. “We are trying to move more outside counsel to alternative fees,” says counsel in a publicly-held company, “but find it difficult to do so where firms continue to measure productivity and profitability based on the billable hour. Firms have been more willing to move certain types of matters (e.g., some IP and labor matters) to fixed-fee arrangements — where the level of work is more routine and predictable. In the M&A arena, firms are very resistant to fixed-fee arrangements — they say because of unpredictability of deals (some truth to this) — but also because this is a highly profitable area for law firms and they don’t want to harm the golden goose.”
Firm Layoffs, Salaries, and Changing Roles for New Graduates
National (53%) and international (66%) firms are laying off lawyers at roughly twice the rate of regional firms (34%). In contrast, local firms (5%) have largely avoided layoffs. Just 21% overall report that associate salaries have been reduced, with a full one-third of national firms reporting associate salary reductions. As a result, some associates have ill feelings.
“Partners have forgotten that their role is as partners, not employees — that theirs is the economic risk of both upturn and downswing,” says an associate at an international firm affected severely by the economic downturn. “That they have cut associate salaries in lieu of taking drastic pay cuts themselves is contrary to the format of a legal partnership. Furthermore, partners seem to completely lack a realistic understanding of how deeply a 10% pay cut affects associates.”
In contrast, a regional firm in a mid-size city reports that it is the partners — even the non-equity partners — not the associates, who feel the downturn most. “So far associate salaries have not been cut. However, 10% of income partners’ pay now is being held back [in addition to the usual 20% budget holdback for equity partners]…. The income partners will not receive any of the amounts held back until the equity partners also do.”
On the hiring front, the good news is that a majority of international (84%), national (74%), and regional (63%) firms are still hiring new graduates. The difference is that 74% of them are hiring fewer new graduates than in the past. In contrast, although only 26% of local firms are hiring this year, two-thirds report that they will hire the same number (in some cases zero) of new lawyers as were hired last year. Of those firms that are hiring, only the international and national firms show a majority deferring start dates.
Most respondents in all law firms (61%) believe that firms will continue to hire new graduates, although many believe the current reductions may last for some time. In addition, there is widespread agreement across all sectors that new hires must expect significantly lower starting salaries and become more productive sooner.
“There will be different tiers of associates in most firms,” predicts a national firm respondent. “Virginia Law associates need not be so concerned, but lower-ranked schools’ graduates have reason to be concerned that traditional lucrative partnership-track jobs are disappearing.”
“Firms will likely reduce their hiring of new lawyers,” says another. “Some firms will try and keep their mid-level associates busy by having them perform work that younger lawyers might have done in the past. This may cause new hires to do work that might previously have been done by paralegals. In other cases, firms may have let mid-level lawyers go, which would have the effect of increasing the substantive demands on new hires (while at the same time removing lawyers that might have previously served as mentors).”
A respondent from an international firm observes that “clients are less willing to pay first year lawyers a high hourly rate for them to learn. What is more likely to develop is lower billing rates for first-year lawyers, coupled with lower salaries and, one would hope, a less crushing hours requirement.” The respondent praises what could “be a shift towards a more sustainable model, where a new lawyer’s focus for the first year is to learn. It could be viewed as analogous to medical interns, a real hands-on year of learning that is paid somewhat.” Another agrees that client demands and economic realities mean that “some practice areas (and firms) will abandon the first-year market. Training first-years will become an issue, an issue that law schools should address (by more practice oriented training in the third-year of laws school).”
In-House Counsel: Publicly-Held Corporations Hit Hardest in Lawyer Layoffs
In the corporate counsel survey, 32% of all respondents reported lawyer layoffs. Hardest hit were publicly held corporations where 46% experienced layoffs. But layoffs are not the only concern for in-house counsel: 74% of the respondents reported they were cutting costs by handling more matters in-house, with 53% saying they were not allowed to hire more staff if needed. To further cut costs, close to half of non-profits and three-quarters of private and publics have negotiated lower billable hour rates with outside counsel.
A majority of corporate counsel respondents (59%) do not believe the economic downturn will change how corporations view the role of their legal departments. Those who do believe it will change think inside counsel will have greater governance responsibilities, maintain tighter control on legal expenses, and keep more work in-house.
“There obviously is more pressure to cut outside costs and bring more work in-house, where control is better,” says one counsel. “[T]hose things don’t easily reverse. But apart from that, there is also more realization that legal costs can be better controlled with counsel involved at the outset, rather than being sought ought only to solve problems that have already occurred. The benefit of in-house assistance is that it’s already in the budget.”
A Changing Paradigm in the Business of Law?
More than half of all respondents (53%) believe that the economic downturn will fundamentally change the business of law going forward. In predicting what kind of change that might be, respondents cited the decline of mega-firms and the rise of smaller firms, greater reliance on experience and training, and lower billing rates and alternative fee structures. Some also believe that changes in the business of law will filter down to law school curricula, requiring schools to reduce tuition, provide more practical training, and/or do away with the traditional three-year degree program in favor of an intensive two-year, year-round version.
An international firm respondent further estimates that we will see “[fewer] junior lawyers being billed out (they will be interns with lower salaries while they train) and less leverage (clients will want more experienced lawyers).” The same individual theorizes that “perhaps the huge Big Law firms will shrink (to reduce overhead costs to compete with top boutiques or ‘mid-size’ firms).” Another believes “you have two things at work—laid off lawyers are starting small shops, and larger regional firms are still trying to become national firms, often through merger: fragmentation and consolidation at once. It may be that eventually we end up looking more like the accounting profession, with a handful of dominant national/international firms and then a bunch of small firms with really not much name recognition, as opposed to 7– 8 ‘AmLaw 100’ firms in each middle-market city.”
A respondent in a regional firm is convinced that “with the soaring student loan debt, something’s gotta give. I think the law schools that start trimming the number of required years at school are the ones that will lead us into a balance. Two years of school and $80,000 of debt makes more sense than three years and $120,000. This would enable law firms to pay incoming associates $80-100,000 instead of the ridiculous amounts paid now.” In addition, the respondent predicts that “law firms are going to adopt different programs for different types of lawyers, giving each one a different status. Some will be associates on the partner track; others will be contract attorneys that are paid much less. Finally, I think law firms will eventually shed lock-step for good and go to a pure profitability and merit-based formula. I can’t envision things staying as they are forever.”
A regional firm respondent agrees that change is on the horizon, but believes “any change will be more incremental than fundamental. Large companies continue to hire ‘brand name’ large firms (and pay ridiculous hourly rates for inexperienced associates) because decision-makers view that as a safe path — no one is going to second-guess your decision to hire Cravath if things don’t work out.” Nevertheless, the respondent concludes that “the halcyon days, with yearly salary bumps and escalating starting salaries, are history.”
And finally, a respondent in a national firm sums it all up. “A very tough year to be a lawyer. Lots of depressing news. I am fortunate that I’ve been really busy this year, but I know folks who lost their jobs, and the overall atmosphere about law firms has been very negative. I am, however, optimistic about the second half of 2010 and all of 2011. 2009 will go down as a year where you just did the best you could to survive.”
The survey was emailed in July to 10,500 UVA alumni, yielding almost 1200 responses for an 11.5% response rate. About one-third of the responses came from alumni in international firms, with the remaining two-thirds split equally among local, regional, and national firms. Two-thirds of the responses came from alumni in a “large metropolitan area,” 28% from a “mid-size city,” and 5.5% from a “small town.”In the corporate counsel survey, 11% of the responses came from non-profits, 29% from privately-held firms, and 61% from publicly-held corporations.