Legal News

The Current Downturn: A ?Perfect Storm? for Law Firms

By Nathan Koppel

In a shift for a profession that tends to be resilient in tough times, big law firms are feeling the pain of the sluggish economy and volatile market, according to a new survey of managing partners.

Legal consultancy Hildebrandt and Citi Private Bank are due to issue a report today, based in part on financial data furnished by 247 firms, indicating that the subprime mortgage crisis and fears of a recession have triggered not only a decline in corporate legal work but also litigation, a practice area that typically gathers steam in down economies. “The current downturn has thus far been a ‘perfect storm’” for law firms, according to Hildebrandt and Citi.

Many firms will increase revenue and profits by only modest amounts in 2008, and “some firms will be down a lot in 2008, with decreases in income,” predicts consultant Brad Hildebrandt (pictured).

Few firms have so far resorted to layoffs or other drastic cost cutting, in part because many experienced healthy growth in 2007, consultants and lawyers say. But layoffs raise another concern: if attorneys are laid off en masse, firms may be caught flat footed when demand for their services picks up again.

But firms are likely to become more ruthless about “weeding out those attorneys who are not performing as well as they should,” says Mr. Hildebrandt. Firms may be particularly apt to prune at the partner level, even though partner firing were once rare, because partners are costlier and sometimes less productive than more junior lawyers, says Dan DiPietro, of Citi Private Bank.

In the past, when capital markets and mergers practices have slowed, companies have been more apt to head to court, suing over deals gone awry and fending off claims from angry shareholders. But overall, court filings in federal court in the subject areas of greatest importance to firms, dropped dramatically from 2004 to 2007, according to data cited in the Hildebrandt report.

One bright spot for firms has been a wave of litigation, including securities class actions and regulatory investigations, following problems in the mortgage market. But such “pockets of work” are “dwarfed by the larger issues looming ove the entire industry which is the slowdown in the economy generally,” says Regina Pisa, the chairman of Goodwin Procter. “Firms will see their work slow down this year,” she says. “There’s no question about it.”

Lawyers, what are your observations, experiences? Feel free to post in the comments section below or send along your thoughts to lawblog@wsj.com.

Full post as published by Law Blog - WSJ.com on January 28, 2008 (boomark / email).