Lawyers are not usually the first to feel the full force of economic downturns. After all, the need for legal services doesn’t go away in the midst of bankruptcies and corporate financial turmoil. In fact, the need for those services often increases.
However, the recent economic crisis is more of a meltdown than a mere downturn. And this time, many law firms are being profoundly affected in ways rarely seen before. While the impact is certainly not as dramatic as at brokerage firms and banks, the legal services industry lost about 7,000 jobs in 2008, according to the ABA Journal. Well known firms such as Thelen and Heller Ehrman have closed their doors, while the historic Philadelphia law firm WolfBlock voted in March to dissolve. And law firm revenue nationally for 2008 was expected to come in at its lowest level in years.
Lawrence J. Fox, C’65, L’68, a partner of Drinker Biddle & Reath LLP and adjunct professor at Penn Law, observes, “The fallout has been far worse psychologically than it has been economically. Firms are acting like everyone else because we are facing the unknown and bracing for something worse. Whatever expansiveness we once had in the profession is gone.”
Some say that one of the biggest longterm effects of the economic crisis on law firms may be a move toward operating more as businesses in terms of increased operational efficiencies, greater attention to innovation, and perhaps even a change in the level of regulation.
“Business has become more global, more facile and is innovating in ways that could only be imagined a decade ago,” says Dean of Penn Law School Michael A. Fitts. “The legal profession has been the wise head in these relationships that tries to provide a cautionary note to protect against the downside, but it’s being pushed to innovate and change the same as business now.”
He continues, “Firms have become more responsive to market forces over the last 20 years and that will probably accelerate in a downturn. A lot of practices will be looked at in a hard way, including how firms bill, how they staff cases, and what type of work they do as well as their relationships with various types of clients.”
Robert H. Mundheim, of counsel to Shearman & Sterling and former dean of Penn Law School, agrees, “Tough times make you rethink how you are organized, how you operate, and whether you are as efficient as you should be. And that is never bad.”
Mundheim adds, “We will see some clients narrow the number of firms they use, trying to partner much more closely with those firms to try to achieve efficiencies and get more of a sense that they are getting value in their legal services. The billable hour concept does not incentivize efficiency and the closer partnering is a way to try to develop efficiency in a different way.”
Fox says that moving away from billable hours would be “fantastic. Billable hours have become a cancer because people are pushed to bill more and more and it’s clearly not in the best interest of clients, but it’s hard to come up with alternatives.”
Penn Law Professor Stephen B. Burbank, who recently co-organized a conference on Leading Legal Innovation, points out that these types of issues are part of an ongoing debate about the level of regulation of legal markets. “The quality of innovation in legal services is nowhere near the quality of innovation that businesses must demonstrate if they are to remain competitive.
If that is true, a likely cause is the extraordinary extent of regulation of the legal profession.”
U.S. legal markets are among the most heavily regulated markets in the world, he says. In addition to restrictions on who can provide legal services and where those individuals can practice, regulations prohibit nonlawyers from owning, investing in or managing a law firm.
Some argue that these regulations limit firms’ ability to respond to demands for new products and reduce costs. For example, the restrictions on who can invest in law firms preclude nonlawyers from providing resources for new ventures and ideas for new legal products and methods.
Burbank notes that the UK recently enacted legislation which could lead to substantial deregulation so that nonlawyers can invest in law firms and what are currently considered legal services could be provided by nonlawyers. Certain legal activities such as litigation and court appearances are still limited to lawyers, but many other services may be performed by nonlawyers.
Deregulation in the UK, says Burbank, will open up competition in the provision of legal services. “A lot of people in this country think that will be good, but a lot of people also think it is bad because core professional values like independence, loyalty and confidentiality could be lost if that happens,” he says. “This is a good opportunity to think about the nature and extent of regulation of the legal profession in the U.S. and what makes sense and what doesn’t.”
KEY TO SURVIVAL: DIVERSIFICATION
While the extent of any long-term changes to the law firm model remains to be seen, many firms have implemented some immediate operational strategies in response to the economy.
Perhaps the most common are the reallocation of lawyers within practice areas and diversification.
Some practice areas such as real estate and M&A are, not surprisingly, very slow, but others, such as bankruptcy and litigation, are seeing increased demand. Boutique firms specializing in certain niche practice areas are more likely having a tougher time than larger firms with diversified practice areas that can better absorb the loss of business in one area by the increase in other areas.
Some firms have addressed this problem by merging, but Eric J. Friedman, L’89, executive partner at Skadden, Arps, Slate, Meagher & Flom LLP, says this is not necessarily the answer. “In this environment, you have to bring your value proposition to clients in a cost-effective manner. Merely bringing more heads together is not in and of itself a solution because the biggest cost for firms is professional expense. There has certainly been an uptick of law firm mergers and dissolutions in the last year or so. But at Skadden, we are sticking with our historical path to grow organically. Rather than looking at a merger, we bring in individual partners or small groups of partners in geographic areas and practices that we’ve identified as strategic in order to serve our clients.”
For example, Skadden recently hired three white collar criminal defense attorneys into their New York practice, as the firm expects to see a significant increase in investigations coming out of the financial crisis.
Friedman notes that “firms with a good range of practice and geographic mix will more nimbly and rapidly adjust to the changing times, which will create opportunities for firms with the right footprint. A challenging environment forces firms to be more introspective, and they will come out at the end of the cycle stronger for it.”
Preparing for a broader future
The current economic climate has highlighted for many law students and attorneys the need to prepare for a different type of legal career. In the “golden days,” the expectation was that you’d leave school and go to a private firm, either spending your career there or moving easily to another private firm. However, lawyers today are likely to move to a variety of institutions during their career, especially as different practice areas cycle through ups and downs in terms of demand. So they need to think about getting the education and skills that will broaden their opportunities and prepare them for an entire career rather than just the first job after school, according to Fitts.
He notes that in addition to providing career counseling for students about the need to gain broad skills and experiences to move into different types of positions, Penn Law also has held sessions for alumni on the topic.
So far, the expanded career counseling and students’ ability to broaden career searches seems to be working. Fitts says that the third-year class — which finished recruiting before the worst of the economic crisis hit — hasn’t seen a significant impact in job placement, and job opportunities for the second year class don’t look that much different from the opportunities in prior years.
“Many of the academic changes made at the law school in the past decade are focused on training lawyers for this type of environment, he says. “We’ve been integrating our program with other fields within the university such as a new threeyear JD/MBA Degree program with the Wharton School because lawyers in the next decade are going to have to have the ability to think through legal rules as they evolve in a changing business and social environment.”
He adds, “Students at a law school like Penn, where they are taught to understand the nature of legal rules and the underlying fields in which those rules will have an impact, are well-positioned.”