Friday, January 29, 2010
Law firms make case for growth
Managing partners: Rebound underway
Spencer Brown
“Every nook and cranny of expenses was considered,” says Orrick Chairman Ralph Baxter, who cut staff and travel budgets in 2009. The new year looks better.
After nearly two years of cost-cutting and hand-wringing, lawyers are starting to get their groove back.
The most significant practices for large law firms — corporate transactions and litigation — are getting busy again. Firms are not anticipating additional layoffs. And some managing partners are already planning growth in 2010 via hiring and even new offices.
“This is the first time I’ve been optimistic in awhile,” said Joe Conroy, chairman of Silicon Valley’s Cooley Godward Kronish LLP, “and I’m an optimist by nature.”
The last two years have been among the most harrowing in a generation for some of the Bay Area’s biggest law firms. Whereas past recessions dinged firms’ growth, the Great Recession wielded the destructive power of a sledgehammer.
Desperate to cut costs, the nation’s biggest law firms laid off approximately 12,000 people last year. About one third of those axed were lawyers and the remainder were staff. Meanwhile, lawyers’ control over fee arrangements has eroded, giving companies greater say over how and what they are charged. That has put pressure on rates.
Still, 2010 augers well for law firms. Law firm managing partners said the worst of the recession is behind them. Clients are sending firms more work, and law firms are expecting to be busy all year.
A few law firms may even try to push through rate hikes in 2010, after a year when that was taboo. Law firms across the country project average rate increases in 2010 of 3.2 percent, according to a survey by Altman Weil Inc., a law firm consultancy.
“Although these results may seem to contradict some expectations for rate freezes in 2010, this is a relatively conservative rate increase by law firms that are struggling to balance their own business perspective with the needs of their clients,” said Tom Clay, a principal at Altman Weil.
Law firms in the Bay Area posted widely disparate financial results in 2009.
Some like Cooley, with 675 lawyers, saw both revenue and profits per partner decline as work declined. Others like Orrick Herrington & Sutcliffe LLP, with 1,100 attorneys, increased both overall sales and profits per partner, thanks in part to practices like restructuring that were able to benefit from the tumult amid the downturn.
Such a mixed bag of results is unusual. Large law firms tend to enjoy uninterrupted years of growing demand. Fifty of the country’s 100 largest firms, as measured by revenue, averaged 7 percent revenue growth in 2008 and 12 percent growth from 2001 to 2007, according to a survey by a unit of Citigroup Inc. that caters to law firms.
Average partner profits at the 50 biggest firms polled by Citigroup were roughly flat in 2009. That would have been much worse had firms not engaged in aggressive cost cutting averaging 7 percent, said Dan DiPietro, head of Citibank’s law firm group.
“Every nook and cranny of expenses was considered” for reduction last year, said Orrick’s chairman, Ralph Baxter. In addition to layoffs, Orrick cut budgets for travel, technology and rent.
Even as lawyers see 2010 in sunnier terms, they remain tempered by lingering impacts of the recession that began in December 2007. Growth rates that law firms enjoyed pre-recession, Conroy said, “will definitely slow down.”
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