As clients call shots, law firms cutting jobs

On any given day, lawyer Morgen Cheshire might find herself toiling away on a tax problem for a nonprofit client, helping to guide young law students through a training program, or wracking her brain to come up with new business for her firm.

But with clients pinching every penny, she says she has been especially focused on finding ways to keep her charges down.

"The message has been conveyed to me that clients are more mindful of costs, and we need to be especially mindful of that," said Cheshire, an associate at the Center City law firm of Schnader, Harrison, Segal & Lewis L.L.P.

In the once booming world of big law, where firms for years had raised rates in lockstep, clients are calling the shots again.

And that is roiling the profession in ways that would have been unthinkable a few years ago.

Under pressure to reduce their charges, law firms nationally are laying off lawyers by the hundreds, delaying start dates for the young lawyers they do hire, and expecting much more of lawyers with more seniority, such as Cheshire.

Some firms are rolling back salaries, while others are being even more aggressive. Center City's Blank Rome L.L.P., in addition to implementing layoffs and delaying start dates, is curtailing summer internships and offering clients flat rates for some work instead of charging by the hour, the traditional model for law firms.

In the last six months, more than 200 lawyers have been laid off by the largest Philadelphia-based firms out of a total employment of more than 10,000 lawyers at offices around the country.

Morgan, Lewis & Bockius L.L.P., the nation's 14th-largest law firm, laid off 55 lawyers and 161 other staff members in offices around the country March 9.

Blank Rome had two rounds of layoffs, 20 lawyers in January and an additional 27 lawyers and 52 administrative staff March 12. Dechert L.L.P., another large Philadelphia firm, said in February that it had let go of 19 lawyers. There were layoffs as well at Drinker, Biddle & Reath L.L.P., a 700-lawyer firm, among others.

Since the layoffs have fallen disproportionately on young lawyers, some industry experts are suggesting that law schools and law firms rethink how they train entry-level lawyers. Under one proposal, lawyers fresh out of law school would serve a residency in which they would be paid more modest salaries as they learned the profession, much as doctors do.

Currently, first-year lawyers starting in Washington and New York are paid $160,000 a year, a source of great frustration to corporate clients who themselves are under intense financial pressure. The top rate for first-year lawyers in Philadelphia is $145,000.

"They [clients] are looking for added value and alternative rates, and they are not seeing the value of what they are paying for," said Charles A. Maddock, a partner with the Newtown Square-based legal consulting firm Altman Weil Inc. "When [the economy] gets better, clients will be even more in command."

A recent Altman Weil survey of corporate legal departments found 75 percent were under pressure from their chief executive officers to reduce legal costs.

Up until last year, big law firms had enough pricing power to raise rates - along with the starting salaries of young lawyers - without fear they would lose business. With Wall Street and the housing market on a tear, it was a seller's market, and the balance of power clearly favored the firms.

All of that has now changed.

Clients are demanding that law firms reduce charges, boost efficiency, and, in some instances, refrain from placing junior staff on their matters. They also are demanding - and getting - alternative billing arrangements such as flat rates for cases involving litigation or intellectual-property work, or lower rates combined with incentive payments if the case concludes successfully.

Some have even suggested that firms sell their art collections.

The law firms, in turn, have launched a massive retrenchment. The industry shed about 12,000 jobs nationwide last year, around 1 percent of its employees, and it appears on track to see similar reductions this year.

The practice areas of finance and real estate have been hardest hit, reflecting the downturn in the housing market and on Wall Street. In many cases, it is the firms' executive committees that make decisions on who stays and who goes.

While bankruptcy and labor-employment law have become hot practice areas, the increased business has not come close to offsetting losses in other areas, lawyers said.

In any other recession-hit industry, such modest declines would be greeted with a sigh of relief. But law firms traditionally have been highly recession-proof and typically have grown when the economy shrinks.

But now partners are under more pressure than ever to stay busy and generate revenue. In some cases, they are doing work younger associates would have done - had the more junior lawyers not been laid off.

"There is going to be less acceptance of work not meeting the minimum expectation," said Ralph Wellington, chairman of Schnader, a 200-lawyer firm in Center City where, as part of an effort to trim costs, five lawyers were laid off earlier this year and hiring has been reduced.

"In most firms, it is the associates who scramble to make the hours and the partners who do business development. In these times, partners need to be reminded that you cannot just assume that an increase in rates is going to make it fine. Everyone has to tighten up on expenses, and everyone has to work harder."

While lawyers such as Cheshire, 34, once were content poring over work supplied by senior partners, they now are intensively focused on finding new clients of their own, the better to secure their futures.

They find ways to get out in front of clients, as Cheshire does, by giving talks on tax issues to professional associations. They network constantly.

"I've always felt that you were measured by the quality of your work and that the job was not guaranteed," Cheshire said.

Though partners have been axed in a few cases, most of the layoffs nationwide have been focused on the junior associate ranks.

Those lawyers had been hired in droves in recent years to handle a flood of deals on Wall Street. The idea was to create what is known in the legal world as "leverage," a high ratio of lower-paid associates to partners. For a time, because the deals were so lucrative and the billing rates so high, law firms made hundreds of millions of dollars on associates whose charges to clients far exceeded their $160,000-plus salaries.

Investment banks did not mind because the deals - the packaging of loans for investors, the buying and selling of companies, and the big real estate transactions - generated such huge profits.

That work had the effect not only of making lots of money for law firms with Wall Street clients, but bumping up billing rates for other practice areas because it consumed so much of the available legal talent, said Francis Milone, chairman of Morgan Lewis.

But now that those deals have dried up, their absence has created a huge downdraft, and picky corporate clients are far more focused on what they are getting for their money. Milone said one common refrain from clients was that they did not want to have expensive first-year associates with little real-world experience handling their cases any longer.

He said clients were pushing the firm to more closely correlate rates with the outcomes of cases. They might be willing to pay more, he said, but they also wanted to be sure that whatever they paid was worth it.

It was partly in response to those pressures, Milone said, that Morgan Lewis laid off lawyers and staff March 9 and delayed the start for first-year lawyers by one year, to the fall of 2010.

"They [clients] want law firms to act in a very different way going forward," Milone said. "They are not going to be willing to pay, frankly, to train first-year lawyers. And when we're paying new lawyers $160,000 and clients don't want to pay for them, you are putting them in a position where there may not be a lot of things for them to do.

"Some clients will tell you, 'I'd rather pay $1,000 an hour for somebody because they have the answer at their fingertips, they don't have to think long about it, and they don't have to do a lot of research.' "