Recession takes toll on law firms

It is, of course, possible that Bill Brennan was simply having a bad moment.

Brennan is a profitability adviser at the Altman Weil consulting firm who has helped guide law firms through four recessions.

When he picked up the telephone, he had just finished an emotionally draining conversation with a lawyer whose firm is thinking about filing for bankruptcy.

That's a switch.

Little more than a year ago, firms were hiring consultants such as Altman Weil to help them map grand, five-year expansions, or plot the takeover of rival firms so they could feast on rich new revenue sources.

Then, as the downturn accelerated last year, many law firms regarded their bankruptcy practices as the path toward economic salvation. Representing failed businesses or their creditors would help offset revenue lost in real estate, mergers and acquisitions, and structured finance, the packaging of now radioactive mortgage-backed securities for sale to investors.

Onward to Wilmington, bankruptcy capital of the universe!

Or so the thinking went.

Now instead of making money off bankruptcy filings, some apparently teetering firms are looking toward bankruptcy as a haven from creditors.

Brennan said one top rainmaker at a law firm had told him recently that he had only three chargeable hours in the last month.

"I have never seen it this bad," Brennan said. "Demand has been slow. Essentially the spigot of work has turned off, and law firms are working down their current inventory. There will be a continuation of bad news and further layoffs. Unfortunately, firms that don't respond quickly enough may not survive."

In Philadelphia, the effects have been muted. Several of the city's biggest firms, including Blank Rome, Dechert, and Saul Ewing, have made cuts. But trims in the lawyer ranks have been in the single digits. Where they have occurred at all. Some big firms, including Duane Morris and Morgan Lewis & Bockius, have had no layoffs.

Brennan has a national client list, and his focus of late has been largely in New York, where the legal industry is pulling back at a rapid clip as its main client base, the financial-services industry, shrivels. He said that might explain his gloomy point of view.

But there's plenty of statistical support for his impression.

The fact is that, until now, the law business has been countercyclical. Typically, it is very resistant to recessions.

Even during the recession of 1990 and 1991, the worst thing to happen to the industry was that it didn't grow, unlike in previous downturns.

By the time the recession of 2000 and 2001 rolled around, the industry reverted to type.

As the stock market shuddered and the economy shed jobs, legal employment expanded. At the start of that recession, employment in legal services was 1,003,000, and by the end it had grown by 34,000, according to the federal Bureau of Labor Statistics.

This time, employment is shrinking. The latest BLS statistics, in January, showed that legal employment was down 1.3 percent year to year.

That's not an anecdote.

One of these days, Brennan said, this will all end and the legal industry, like the rest of the economy, will recover.

But getting to that point is going to be painful.

He is advising firms to make cuts simply to survive in the near and medium terms. The idea of long-range planning, or fostering practice groups that, though they aren't profitable now, might produce revenue in the future, is simply an unaffordable luxury for some.

"If a firm may not make it to the long term, they need to focus on the short term," Brennan said.