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Recession: A Grim Toll On Firms
The Legal Times
December 10, 2001
By Jennifer Myers

The economic pain in the legal market continues to mount, as more lawyers fall victim to a sharp drop in corporate legal work.

Layoffs, once rare, are now part of the D.C. landscape: Two of the city's leading firms let go a total of nearly 30 associates over the past few weeks. And the pain is not limited to layoffs. Senior associates vying for partnership slots, as well as non-equity partners seeking a stake in their firms, are finding things no rosier, as several firms cut their partnership classes in half this year.

Last week, Shaw Pittman laid off 19 associates firmwide along with a smaller number of administrative staff. Managing partner Paul Mickey Jr. says the greatest impact will be in the transactional area, though no first-years are affected. The lay-offs take effect Jan. 1, and the firm will pay the departing associates' salary until mid February.

The move came days after the firm announced just four new partners in its D.C. and Northern Virginia offices, down from eight in 2000 and seven in 1999. "We added over a hundred lawyers in 2000," says Mickey. "Client demands for our services just haven't grown as much as the firm has grown."

Right before Thanksgiving, D.C. giant Arnold & Porter released nearly 10 associates during its annual review process and told almost twice as many others that they would not be promoted and given raises with the rest of their classes, say firm associates. While the number of associates released after performance reviews is not unusual, the firm hasn't opted to hold so many associates back since the early 1990s, according to associates.

Efforts to elicit comment from several partners in management at Arnold & Porter were unsuccessful.

Approximately two weeks later, A&P announced eight partner promotions, a number similar to prior years. But there is a catch, say two associates: Four, including some home-grown attorneys, were made contract partners, meaning their status as equity partners will be reviewed in two years. That position is typically reserved for laterals.

Shaw Pittman and Arnold & Porter are not alone in going uncomfortable lengths to shore up the bottom line. The Venture Law Group - a bellwether Silicon Valley firm with a small presence in the D.C. area - slashed base salaries, dropping first-year income by $25,0000 to $100,000, and third-year pay from $150,000 to $115,000, while upping the number of shares associates have in the firm. Venable: Fenwick & West; Swidler Berlin Shereff & Friedman; and Wilson Sonsini Goodrich & Rosati all announced partnership classes smaller than last year.

"Firms are not making partners because they have a much lower risk of losing people," says one legal recruiter. "It's definitely a buyer's market."

After initially shying away from statements that the economy has played into associate and partner decisions, managing partners are starting to publicly acknowledge the effect of the nationwide recession on their firms.

"We expect to make a number of partners. That said, we don't operate separate from the economy," says Piper Marbury Rudnick & Wolfe Chief Operating Officer Jeffery Liss. "Certainly, the economy is something that could affect individual decisions."

Liss declined to disclose the size of this year's partnership class, which has not yet been announced.

Says Shaw Pittman's Mickey: "We have some very talented lawyers who are far less busy than they want to be."

Feeling the Crunch

Shaw Pittman's layoffs follow a trend that started several months ago with California's Silicon Valley firms and crept its way east. Many are convinced that Shaw Pitman will not be the last, convinced that problems with receivables in 2001 may motivate partners to shed more associates come 2002.

But layoffs are not the only cause for anxiety. Senior associates are not making the leap to partner in the same numbers as in prior years.

Swidler Berlin promoted four fewer partners this year than last, making three partners in the District and two in New York. Baltimore-based Venable elected five partners firmwide this year, a drop from 11 in 2000 and nine in 1999. Palo Alto, Calif.'s Wilson Sonsini only added five to its partnership ranks, after elevating 23 in 1999 and 14 in 2000. Neighboring Silicon Valley firm Fenwick & West made only four partners this year, down from a firm record of 10 in 1999, and six last year.

At Venable, for example, all five associates nominated by their practice group leaders became partner this year. The number nominated was less than half of last year, though.

"Did (the economy) impact the divisions' decision? Possibly," says Judith Wheat, a partner in Venable's D.C. office and chairwoman of the partnership selection committee. "Probably everybody is taking a closer look these days at everyone."

Regarding Shaw Pittman's smaller partnership class, Mickey says, "We try consciously not to have our decisions be numbers-driven, and overall I think the economy had a modest impact on the size of the group."

Senior associates who expected to make partner and didn't are also facing an unfriendly lateral market.

"I probably have more resumes of attorneys who fit into that senior associate level than any other level," says headhunter Mary Adelman Legg of Firm Advice, Inc.

For those who made it into the partnership circle, increasing numbers are still having trouble grabbing the equity crown. More and more firms are moving from a pure equity partnership to staggered structures.

Arnold & Porter, which in the past has moved top associates directly into the equity ranks, place half of this year's class into the contract partner status, say two associates still with the firm. The contract partners have a two-year agreement with the firm, say the associates, at which point the firm usually rubberstamps them into partnership. However, they say, the firm reserves the right not to make them full partners, or to ask them to renew their two-year contract. A&P management could not be reached for comment on the partnership class.

At minimum, a $1 million book of business seems to be the ticket for entree to equity partnership at many of the District's top law offices, say legal recruiters. And with the declining market, that standard is becoming harder and harder to reach.

"There is no uniform standard, but clearly the bar keeps going up," says one headhunter, who adds that there is" no question" that fewer nonequity partners are making equity this year.

"Law firms are so focused on increasing profits per partner each year. That's their barometer of success," says Firm Advice's Legg, who agrees that many top firms require $1 million in billings, with many smaller firms looking for candidates with more than $500,000 in work. "Otherwise, it's diluting their profits per partner."

But partnership numbers as bleak as they seem, don't always reflect the ups and downs of the market. Firms often base their decisions on who will be the rainmaker for years to come, or who has the potential to run the practice group. Venable's Wheat points out that the partner promotions were made in the firm's business, environmental, and technology areas.

"We made three business associates partners and our business is not having as good a year as they did in the past," she says. "We didn't have anyone up from the litigation group, and the litigation group is going gangbusters."

Solid Ground

The sobering layoff and reduced partnership class numbers also tend to overshadow other firms where, at least for the time being, things appear to be on even keel.

Akin, Gump, Strauss, Hauer & Feld announced the promotion of 12 attorneys this year, a number similar to the 10 in 2000 and 13 in 1999. Covington & Burling elected five D.C. partners, after it elevated three in D.C. last year and five in 1999. Howrey Simon Arnold & White made seven associates D.C. partners, close to its eight in 2000 and nine in 1999.

Houston's Baker Botts increased its partnership ranks by 13 this year, the same number as in 1999. The firm added 24 partners last year, which it attributes to a shortening of the partnership track that caused two classes of associates to be reviewed at once. D.C.'s Hogan & Hartson also shortened its track last year, when it made 21 partners. In 2001, Hogan expects the numbers to return to normal figures, like the six it promoted in 1999.

And just because a firm is downsizing doesn't necessarily connote gloom and doom. Some, like legal consultant Lisa Smith of Hildebrandt International, see reduced partnership classes as responsible fiscal decisions. "I think it's a good move if the work doesn't demand it.

"It may mean that they may lose some senior associates," she adds, but they were unlikely to be "potential business generators."

Legg questions if another adjustment to partnership structures may be due at many firms. "I guess law firms have to look at what accounting firms do," she says. "They don't make as many partners."

 
 
 


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