Legal News

Report Advises Firms to Trim Associate Bonuses, Unproductive Lawyers

By Dan Slater

Over at AmLaw Daily, Citi Private Bank’s Dan DiPietro reports on the results of surveys of firms in the Am Law 100 and second hundred, and a number of smaller firms. The takeaway? Not good. In the first two quarters of 2008, writes DiPietro, “profit margin compression–that is, expenses increasing faster than revenue–was the greatest it’s been in the last eight years.”

Here are the highlights:

Too many lawyers: “Because law firms continued to add lawyers to their ranks despite the drop-off in demand,” writes DiPietro, “firms experienced a slowdown in productivity comparable to the second quarter of 2001 and lower than every other second quarter between then and now.”

Unproductive lawyers beware: Among other things, DiPietro advises firms to “consider sending a tough message to unproductive lawyers at every level,” and to “conduct a systematic expense review to eliminate redundant or nonessential support staff and functions.” As for hiring in a soft economy, he writes: “[I]t’s particularly important to vet candidates to differentiate between laterals who are looking to move because they’re not happy and those who are looking to move because their firms are not happy.”

Associate bonuses (a/k/a “the elephant in the room”): DiPietro is paring back earlier estimates for 2008 profits-per-equity-partner. “[W]e now believe PPEP will be flat, or even down by as much as 10%, in 2008,” he writes. “The top-tier firms will have an even tougher year, with profits down by 5–15%. Our reason for providing a range is that there is an elephant in the room: How will firms, particularly the top-tier firms, handle associate bonuses this year? The rational approach would be to pare them back, but, while lawyers display rationality and dispassion in the practice of law, they have exhibited ‘irrational exuberance’ on this issue in the past.”

Most profitable firms hit hardest: Demand drop-off and expenses were accelerated at a more rapid pace at the top firms, writes DiPietro. He explains that top-tier firms tend to rely on high-end private equity deals, securitization, and structured finance, and have more financial service clients. Now, with those markets in decline, top-tier firms “are paying the price,” and the practices that firms typically rely on in a downturn, such as restructuring, bankruptcy, and litigation, haven’t helped “cushion the drop-off in transactional work.”

A silver lining? “A bad year (and the numbers suggest 2008 will be even more trying than 2001, when partner profits were down slightly),” writes DiPietro, “will enable firms to take steps that partners would resist in a good year–winnowing out unproductive lawyers and applying greater discipline to expense control.”

Full post as published by Law Blog - WSJ.com on August 21, 2008 (boomark / email).