In a followup to our earlier post asking whether firms should raise the profits of partners, it looks like, for at least one prominent firm, the answer may be “Yes!” At least, for some partners.

We noted that according to the latest AmLaw 100 data for 2012,  “[t]he largest PPP drops were Fried Frank’s 16.8% fall to $1.3 million and Weil’s 8.6% decline to $2.2 million, after revenue declines of 6.3% and .1%, respectively.”

On the heels of that data came the announcement late last month that Weil, for the first time in the firm’s 81-year history, is taking action: trimming associate head count by over 60 lawyers, or 7%, laying off 110 non-lawyer employees (roughly half secretaries), hitting 30 of its 300+ partners with significantly lower compensation, and reducing its complex commercial litigation practice in Houston and Boston. Evidently lowering compensation is easier than expelling partners, and there is the implication that those with reduced comp might well consider going elsewhere.

Managing Partner Barry Wolf had said early this year that Weil’s financial performance in 2012 was satisfactory because, though profits decreased, demand had increased 3%. With this recent announcement, however, he noted that demand had fallen in the first quarter of 2013 and failed to recover in the second quarter, in spite of the firm’s leading positions in 2012:  Weil ranked as the 13th top-grossing firm in the country, according to the American Lawyer magazine, ranked No. 1 in private equity representations globally and No. 2 in domestic mergers and acquisitions, and still maintained that M&A position in 2013, advising on deals like the American Airlines merger with US Airways.

“As the restructuring and litigation work related to the 2008 financial crisis winds down, and as the overall market for transaction activity remains at the lower levels which we believe is the new normal, we must now make the adjustments we avoided over the last few years to position the firm to continue to thrive,” according to Wolf. He added that while the firm “will continue to take significant steps to further increase our market share,” evidence that “the market for premium legal services is continuing to shrink” dictates that “actions to enhance revenue alone will not be sufficient to position the firm as necessary for these new market conditions.”

A mix of income and equity partners from all practice groups at Weil, but from litigation and corporate practices especially, will see their compensation cut significantly, estimated at cuts of between $200,000 and $500,000 a year per partner.  According the The American Lawyer, the decline in Weil profits last year came as the firm added 20 lateral partners, and has already produced a number of partner departures this year, with eight partners leaving since January 1In “positioning the firm to thrive,” one of the upshots, one assumes, is also to stabilize a dropping PPP and set the stage for its rise for the keepers among partners.

Wolf  made a point of distinguishing Weil’s situation from Dewey & LeBoeuf’s. Evidently Weil does not carry any firm debt, has not extended guarantees to laterals beyond one year and has fully funded its pension plan with over $500,000 of assets, which many top-flight firms, like Davis Polk and Dewey Ballantine before its merger, have not managed to do.

Weil took action after Wolf heard from Dan DiPietro, chairman of the law firm group at Citi Private Bank, that average annual partner hours billed at the country’s 15 most profitable firms had declined by about 10% since 2008. According to DiPietro, law firms conservatively have 6.5% excess lawyer capacity, with those “higher up in the food chain” closer to 8- 8.5%, and with the greatest excess capacity at the higher-priced income partner and counsel level.

Dan DiPietro has been quoted as saying that the profession could experience another wave of job cuts after a weak first quarter. “My guess is that a good number of firms have been thinking about right-sizing and waiting for someone to provide them cover and we’ll see more of these moves… As difficult as layoffs are, it seems that they will be necessary for some firms to get in sync with the current market dynamics.”

According to an informal survey of large firms, most think that Weil’s move does not signal the beginning of a new wave of blood-in-the-streets dismissals like occurred during 2008-2010 when there were staff and/or attorney layoffs at 98 of The Am Law 200 and at least eight U.K. or European firms with New York offices.  They view Weil’s bankruptcy-heavy practice as simply running out of major matters to keep the stove stoked.

Law firm management consultants seem to uniformly think otherwise–that firms will in fact have to “right-size” again, but they have been accused of promoting “the profession’s transformation to just another business. They consistently endorse businesslike steps to maximize short-term profits.”

There are those who still talk optimistically about the improving market and additional hires–the Wall Street Journal reports that Law Firms Regain Some Pricing Power and The National Law Journal reports Large Firms in a Hiring Mood Again.  In the meantime, DiPietro’s and some consultants’ predictions also see some evidence of being accurate.  So far this year Patton Boggs is lighter by @ 80+ personnel–almost 50 lawyers and the rest non-legal.  “I think the firm is just right-sizing,” said one partner.  And Jones Day has let go 65 of its IT staff, including its CIO.  Goodwin Proctor has announced that 22 lawyers and staff will be let go in September. Then the UK’s Allen & Overy announced recently that although its gross revenue  increased slightly (0.6% to  $1.84 billion) in the most recent fiscal year, PPP of $1.7 million was essentially flat for the third year in a row.

As one commentator pointed out: “The good news is that few US-based firms have taken steps to differentiate their offerings and to embrace the client demand for value. So BigLaw still has plenty of opportunities to do well. For many firms, however, this will mean working in new ways.”

The key to raising partner profits?  Providing value to clients in ways that other law firms are not.