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Law Firm Partner Layoffs? Hardly A New or Shocking Development

NYC TEACHERS'  PROTEST RALLY AGAINST LAYOFFS  ...

NYC TEACHERS' PROTEST RALLY AGAINST LAYOFFS & CUTBACKS / MARCH FROM CITY HALL > WALL ST. > BATTERY PARK - Lower Manhattan, New York City - 05/12/11 (Photo credit: asterix611)

 

The Question About the Announcement Concerning the Howrey Partner Layoffs Was That it Was Newsworthy At All

 

                            

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             March, 2010

                                                                  

 

          Some portions of the legal community seemed to take it by surprise that Howrey announced this week that it was laying off 30 partners.  The primary surprise was that Howrey elected to make the announcement public.  The other surprise was that so many in the profession and the media professed to be shocked by the news.  In some of our earlier posts, we discussed the trend towards partner layoffs at law firms.  We were hardly prescient; we simply reported on facts on the ground that escaped much of the trade press and frequently the attention of much of the legal community.  Moreover, we have predicted that this trend will likely continue for the near and intermediate term.  Nothing we have seen suggests that this unfortunate trend will abate soon.

An enigma to some observers of the 60 or so partner layoffs at Howrey, may be the faintly lingering myth that partners have virtual life time tenure and are equity owners of the enterprise.  Robert Ruyak, managing partner at Howrey helped debunk that myth when he recently described the relatively wholesale partner layoffs as a “massive restructuring” facilitated in part by the ability to outsource discovery to offshore vendors. One does not “restructure” by firing owners, nor can ownership, or, indeed, tenure be outsourced.    While Mr. Ruyak explained that the reduction in force of Howrey was essential for its economic survival, he also suggested that such layoffs could have been largely avoided but for American legal principles precluding law firms from simultaneously representing conflicting interests.

Of course, at the sad end of the day, Mr. Ruyback’s “massive restructuring” ended with his call for his partners (or at least 75% of them) to all jump ship and board the lifeboats being offered by Winston & Strawn, leaving at least 25% of his partners adrift.

The fact is that for the past fifteen months, large law firms have been quietly asking partners to leave.  Some of those partners were primarily “service” partners; others were partners whose practice areas were in a downturn or whose client base could not and would not pay the high fees that the fixed infrastructure of large law firms requires.  Members of the latter group certainly have many recourses.  Middle market law firms, who have fared comparatively well during the Great Recession, have their welcome mats out for these lawyers. These middle market firms are driven by middle market clients who are far more comfortable in paying reduced rates which those firms can profitably charge.

The sad irony was that prior to 2009, partners at middle market law firms were moving up the food chain, entreating larger firms to have them join their ranks, because their client bases were growing and the platform afforded by larger firms allowed these partners to offer a greater diversity of services in a greater number of geographical locations. The trend is now reversed as partners for their own survival and to maintain their own client bases find themselves to now move in the opposite direction.

However, before law firms act on these new opportunities, they should carefully read our earlier post entitled The Market for Laterals in 2010; partners seeking new opportunities in this changing market should similarly read that posting and be fully prepared to respond to the questions suggested there.

Law firms are in many material respects economically anomalous in a variety of ways.  One of these great anomalies is that there are no economies of scale in large firms.   In fact, the larger the firm, the higher is the fixed cost of the firm to maintain each lawyer, exclusive of compensation.  The inexorable result is that large law firms are constrained to pay high hourly rates simply to meet fixed expenses.  The converse is axiomatic, smaller firms have lower per lawyer costs and are therefore able to charge lower rates and yet yield comfortable profits. These smaller firms are also less prone to fall victims to wild swings in economic cycles. In other words, partners at well managed middle market law firms make steady relatively predictable profits and are not prone to be victims of large market fluctuations.

As we all know and as mentioned above, law firms have been quietly asking partners to leave for the last fifteen months.  We all understand that the notion that partners, equity or contract, are, in today’s world as much employees at will as anybody else in the law firm universe.

Certainly, most, if not all, partnership agreements contain provisions that require either a majority or super-majority vote to oust a partner.  However, a partner who is summoned by a managing partner or an executive committee group and is asked to leave the firm almost always recognizes the plain reality that while he or she can demand a partnership vote, as is his or her contractual right, it is extremely unlikely that the partnership would buck management recommendations, particularly in these perilous times.  Moreover, demanding such partnership votes inevitably results in a public spectacle and deprives the departing partner to use the cover, when seeking a new position, to explain to a prospective new employer that his or her decision to leave was made reluctantly and that his or her client base could no longer afford the high hourly rates large law firms require. Rather, by demanding the contractually mandated partnership vote, the departing partner is inviting a public announcement that he or she was fired — indeed, his or her tenure at the firm began and ended the same way:  Fired with enthusiasm.

Partners, vested with maturity, almost always saw the wisdom to leave quietly and certainly not immediately report to the various blogs that the law firm is engaging in layoffs, stealthy or otherwise, as so many associates feel is an imperative.

As we have also noted in the past the strange year end announcements from various law firms that while revenues for 2009 took a dip, profitability had increased.  Many of these blips were not only attributable to sharp reductions on the expense side, but also resulted from the “ramp down” effect:  Just as law firms make an investment in bringing in a lateral partner by compensating him or her during the 90 to 120 day period following a start date until WIP results in cash in the bank, so too, eliminating the expense of compensation, while continuing to collect A/R and WIP, results in one time booster of profitability.  The danger in enjoying the benefit of ramp down profitability is that these are events not subject to replication and often result in revenue issues for the years that follow.  Reduced headcount limits revenues.  Replacing those who have been shown the door in the years that follow, as the economy expands, requires new investments in laterals and incurring “ramp up” expenses.

So, yes, partners have been shown the door with some degree of regularity for the last past 15 months. The evidence is conclusive in walking through corridors and seeing vacant partner and associate offices. Further evidence is made available as firms report on headcounts as the new year begins.  Yet the headcount reports are certainly not always terribly reliable, since not all firms, quite regrettably, report with consistency or accuracy the true headcounts at year end.

All too often removal of partners by firms fail to take in to account the new reality:  Leverage and hours billed are models very much on the wane.  Clients are demanding the efficient delivery of quality legal services at predictable costs.  They are becoming most indifferent to the numbers of hours required to complete an engagement.  Rather, clients simply want to know how much an engagement will cost from start to finish and are, as a whole, most cost conscious.  And the most valuable resource law firms possess who have the capacity to efficiently deliver quality legal services is mature, well seasoned and experienced lawyers.

As I said, law firms are uniquely economically anomalous enterprises.

© Jerome Kowalski, March 2010; All Rights Reserved.

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11 Responses

  1. […] which, consistent with our previous report, recognizes that law firm partners are in fact employees at will  and accordingly applied its regulations barring age discrimination to first sue Sidley in 2007 […]

  2. […] is that law firm partners are being laid off with some regularity.  We previously reported that partner layoffs are hardly a shocking development.  As I subsequently noted in a different context, partnership agreements, notwithstanding, law […]

  3. […] ramifications to law firm partners upon the dissolution of a law firm.  While the demise of Howrey seemed quite inevitable a year ago, it could have been and should have been […]

  4. Which is more important for any company: revenue growth or profit?…

    EBITDA and similar metrics have no place in evaluating a law firm, whose only real assets are its partners who are largely employees at will (http://kowalskiandassociatesblog.com/2010/03/16/law-firm-partner-layoffs-hardly-a-new-or-shocking-development/

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  6. […] Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm.  I haven’t been able to find a new slot and my firm wants me out right now, so I may as well […]

  7. […] are alternatives. Others are leaving their firms with the same spirit in which they arrived:  Fired with enthusiasm. Other partner will be seeking more hospitable climes because of law firm failures […]

  8. […] be directed to a psychiatrist for emergency treatment. Partnership had real meaning, it was not an at will employment status and partners would not for a moment think of themselves as free agents, available to the […]

  9. […] are tough decisions, but we get paid big bucks to make these tough decisions. We made these folks partners and I guess we can unmake them as partners.  Everybody will understand that we are doing this for the good of the firm. Let’s also be strict […]

  10. […] on the honorific of being an equity partner in a world where partners are free agents and where partners are employees at will:  These ex Dewey partners will probably face years of legal proceedings as well as serious adverse […]

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