Innovation may be coming to law firms the hard way—prompted by crippling economic conditions. As pointed out in our entry “Fearing Fear“ on February 9, a natural reaction to the downturn is fear, which often neurologically prompts “pencil counting,” or furiously holding on to whatever you still have. Fortunately, if you push through the fear, there is the possibility of another response, and that is creative innovation. So far there are not any major revisions to the business model, to be sure, but at least there are some spasms of change.
Law firms are notorious lemmings, hesitant to do anything everybody else isn’t doing. But in this downturn firms are starting to take more individualized approaches to managing their businesses, particularly with respect to reducing their largest expense: compensation. Reducing compensation costs through across-the-board associate salary and bonus freezes, delays, or cuts, jettisoning practice groups that are not deemed profitable or imposing layoffs have been the most common steps taken. Another approach is a reduced hours work week–targeted, across-the-board, or by invitation to those who want a period of work-life balance that errs on the "life" side. Even “furlough,” a fancy corporate word for temporary unemployment, is appearing in the downturn vocabulary of law firms, with the promise of holding on to talent for when business returns.
Pillsbury, one of the firms whose layoffs were outed by Above the Law because of a partner’s indiscreet cell phone conversation on a commuter train, has preempted those layoffs with a “voluntary departure plan” for lawyers who want to leave of their own accord.
But some firms are also paying new associates to arrive later, to work at public or non-profit organizations, or to be seconded to clients, a move that can cement wobbly client relationships.
Another approach is to manage compensation by changing or expanding tiers. A number of firms have de-equitized partners and quite a few are considering thinning their non-equity partner ranks by moving those attorneys into different tiers.
WilmerHale is putting more steps firm-wide on its attorney ladder. To the titles of associate, counsel and partner will be added senior associate, special counsel, senior partner (for those approaching retirement) and senior counsel (for partners practicing beyond normal retirement age). Co-managing partner Bill Perlstein hopes the move will increase flexibility and allow attorneys a greater choice for their career path. Given increasing attorney preferences, particularly among Gen Xers and Yers, for more personal control over their schedules, additional tiers, if announced and managed thoughtfully, can help create a more satisfied, productive team.
Partner compensation is often the “untouchable” at firms, but even there, change is in the offing. Chicago firm Much Shelist Denenberg has announced a temporary across-the-board 10% pay cut for all lawyers, partners as well as associates, through the end of its fiscal year. Sharing the pain can promote those firms that pride themselves on their egalitarian treatment of all lawyers.
Patton Boggs recently announced that it is replacing its “eat-what-you-kill” partner compensation system with one that also rewards cooperation and firm-wide business development, associate mentoring and training, and moving clients to the next generation of client managers. The compensation review will look back three years instead of two to give partners longer to realize on business development efforts. Under this system, a partner’s income cannot fall in any given year more than 25%. Over 90 percent of equity partners voted for the change, which managing partner Stuart Pape called an “incentive for doing things that are supportive, collaborative and productive…In bad times, a meritocratic system is absolutely the best model.”
On the other side of the pond, similar tactics, and innovation, prevail. Allen and Overy, when axing 450 attorneys and staff, announced that it was spinning off part of its practice, imposing a pay freeze and asking remaining partners to each contribute an average of about $50,000 in additional capital to the firm. That move is expected not only to boost the firm’s coffers but to raise the commitment to the partnership and its success of those partners willing to put their dollars there.
Doing It Right
The way that these initiatives are both announced and carried out have a major impact on firm culture and morale. Latham & Watkins’ stunning announcement recently of layoffs of 12% of its associates was accompanied by very generous (six months compared to three months) separation payments and health insurance, as well as interim salaries for new associates who delay their entry a year. In spite of the severity of the layoffs and questions about what the firm will look like in the future, the street buzz on the firm’s handling of the layoffs has been positive—“classy” is Bruce MacEwen’s assessment. Similarly, the Philadelphia District Attorney’s Office rescinded offers to its incoming attorneys only after several attempts to cut costs, and, when the inevitable occurred, actively sought jobs at other DA offices for those dis-invited, hoping to preserve relationships with lawyers who they might one day want to extend offers to again.
Latham and others have also received kudos for making the cuts in one whack instead of dribbling them out, as Dechert, for example, seems intent on doing. Although the realities of the downturn may drive some firms to second and third whacks. In one of the largest cuts of this layoff season to date, Orrick sent home 12 percent of its nonpartner lawyers on Tuesday, the second cut after a November 2008 one that promised to be the one and only. Those laid off Tuesday didn’t fare as well as those cut in November: they got three months’ severance instead of five.
Sign of the Times or Window into the Future?
Are these fairly modest innovations we are seeing now simply a sign of these difficult times, or do they signal a growing snowball of changes that could well roll far into our future?
These changes are not in and of themselves going to make any major inroads on the broken business model that now exists, but hopefully they signal a greater willingness (ok, motivated by a gun to the head) to get out there and slog through the swamp of uncertainty until we find firmer ground.
Experimentation is what will drive innovation, and up till now law firms have been fat and sassy enough to be able to afford not to experiment. But the old "one size fits all" attitude about how firms should be run is beginning to fray. Unusually bad market conditions have freed firms to stop copying what everyone else is doing and look more carefully at and respond more creatively to who they specifically are, where they are headed and what resources and skills they need to get there.
Given the layoffs across the country, if a recovery is not in motion soon, the next issue for firms to grapple with creatively may well be the dissonance between recruitment and retention that the current structure produces. How long can firms withstand waves of painful and expensive "forced attrition" at the same time they are undertaking time-consuming and expensive recruitment and training of new incoming associates, who may well then be forced to move on in a few years?
After arrival dates, compensation, bonuses and tiers have been manipulated, we can then start facing the decisions that will direct innovation toward the very structure of our firms and the traditional lawyer life-cycles there.