“Praemonitus Praemunitus” – What’s In the Present is In the Past

As we all work to address rebounding economy issues, an examination of the past in the legal market instructs us on what we may expect in the next few months or years. The Latin phrase “Praemonitus praemunitus” translates to “forewarned is forearmed,” an appropriate motto for the currently halting recovery in the legal and national economic market. Although the recent (receding) recession outdistanced all down times save the Great Depression, it bears similarities to downturns past. Below is a recap of happenings in the legal market for the past two decades, followed by a summary of steps reminiscent of previous steps that are currently being taken to address both the new market and client demands. We hope this piece affords insight into the full rebound we are hopeful will occur and with an eye to allowing us to welcome the present and take action in it armed with well-earned hindsight.

• 1990s – Law firms, concerned about competition from financial institutions and dot-coms, begin ever-increasing “salary race.” In a move toward hipness, they begin to implement business casual dress in the workplace.
• Late 1990s – Owing to the booming economy and the Internet, firms are awash in work (the First Happy Time).  From intellectual property to real estate, firms prosper. Salaries for first year associates exceed $100k in New York and other large markets.
• 2000 – First year associates receive increases to their starting salaries before they begin work at their respective firms. (E.g., a firm increases first year salaries from $105k to $120k between October 1999 and June 2000).
• Late 2000 – Dot-com bubble bursts.  Market flooded with folks who were paper millionaires, but now can scarcely afford a studio apartment in even some of the more unenvied areas.
• 2001 – Economic downturn continues – firms see M&A and IPO work dry up. Firms do not increase first year salaries for 2002. Some begin to quietly cut overhead, i.e., attorneys and staff.
• Mid-2000s – Economy recovers.  Financial institutions prosper. Real estate skyrockets. Deals are on, and everyone is litigating (the Second Happy Time).
  
• 2007 – Sub-prime derivatives get exposed as terrible risk. Economy stumbles, falls. Firms see continued litigation, but corporate and real estate deals begin to dry up. Foreclosure and bankruptcy work boom.
• 2008 – Markets at worst point in decades. Lehman Bros. and Bear Stearns go down. Banks fail. Government forced to step in and prop up economy. Firms see major decrease in workload.
• 2008 (cont.) – Associates are nervous. Many firms cut staff and attorneys. Firms begin reducing salaries, withholding bonuses. Anxious clients begin to reduce their expenses and hold off on consummating deals and even balk at instigating litigation. Companies demand rate reductions and more say let’s move toward outsourcing as a means of staffing legal work.
• 2009 – Market hits low in March.  Entire departments are dismissed. Firms dissolve. Attorneys flood the market. Overqualified partners and associates have difficulty finding even document review work.
• Late 2009, early 2010 – Firms continue to critically monitor expenses, but see uptick in workload. Some firms consider expansion. Clients continue to demand more control over expenses.

All affected parties in this market have taken steps to lift themselves back to economic stability. One common response to the down legal market by many corporations has been to take a very hard look before initiating litigation. Corporate clients across the country are thinking twice before litigating and have sought both a reduction of new litigation, an end to existing litigation via early settlement and a higher scrutiny of expenses attributable to it.

Corporations are also continuing to cut costs through greater use of in-house counsel and less of outside counsel. They are also more aggressively managing their litigation with a greater hands-on approach and attention to settlement opportunities. 

Another ongoing trend has seen the movement of partners and practice groups from larger national firms to midsize and boutique law firms. Reduced hourly rates often follow these moves, reductions that are quite appealing to corporate clients. Last year, a number of partners with AmLaw 150 firms, sometimes with their practice group in tow, moved from large firms to smaller firms as an avenue to keep and attack the growing ranks of more frugal clients. 

Alternative billing structures have long been hot topics with in-house counsel, and perhaps never more so than now.  The push from the client side takes the form of requests for flat fees, more accurate estimates and caps on total cost. Today the client’s billing pressure has not waned and their demands have been heard. One national firm, at the behest of its clients, has taken action, flattening associate compensation rates (with resultant savings to clients) into 3 levels that must be attained via performance and competency, not time.

Finally, as we saw in downturns past, for some time law firms coast-to-coast have reduced starting associate salaries and lock step pay increases. The reductions in both starting pay and lock step raises appear in many forms, from across-the-board cuts to new programs that allow the associate to gain and demonstrate greater value before being billed to the client. Cuts as high as 20-25% of annual salaries are not uncommon. There are also programs that revamp salary from one year to the next based primarily, if not solely, on performance.

“Forewarned is forearmed,” indeed.