Law Students

How the Slumping Economy Has Hurt Law Firms

By C. C.

A careful analysis of the recently released National Law Journal 250 reveals some surprising trends. The NLJ reports that the nation’s largest 250 firms (by lawyer headcount) shrank by 4%. Yet, when broken down by geography (see figure below), nearly half of the losses (2,096) were concentrated in the 45 firms headquarters in New York City. And another 20% (883) fell on the 17 NLJ 250 firms headquartered in Chicago.

To put those figures in perspective, for 2008 (the baseline year), NYC- and Chicago-based firms only accounted for 24.7% and 14.7% respectively of the NLJ 250 total lawyer headcount. In contrast, DC-based firms accounted for 9.7% of the NLJ 250 universe in 2008 but only 3.8% (161) of the total contraction. The disparate geographic impact suggests that the reductions-in-force are probably due disproportionately (or overwhelmingly) to the decline in the volume of corporate transactions and woes in the banking and insurance sectors. Among major markets, San Francisco-based firms shrank the least, though this glass-half-full news is probably the result of the dissolutions of Thelen Reid and Heller Ehrman in late 2007, which were both headquartered in the Bay Area.

On comparative basis, the middle-market firms appear to be thriving. Collectively, there was a 0.6% increase in the number of lawyers in the 91 NLJ 250 firms based outside the Top 10 markets. In contrast, firms headquartered in Top 10 markets did uniformly worst. Below is a ranking based on percentage contraction:

1. New York City (45 firms) -7.0%
2. Dallas (7 firms) -5.9%
3. Houston (4 firms) -5.4%
4. Philadelphia (15 firms) -5.4%
5. Atlanta (9 firms) -5.3%
6. Chicago (17 firms) -4.7%
7. Los Angeles (11 firms) -2.7%
8. Boston (10 firms) -2.1%
9. Washington DC (18 firms) -1.6%
10. San Francisco (9 firms) -0.1%

Firm size appears to be a major explanatory variable, particularly for associates. Here is the breakdown of changes in lawyer headcounts by size of firm:

So what is the bottomline analysis? I think the slowdown in the economy has made the largest firms the most vulnerable to price pressure from large corporate clients. The largest firms have the highest cost structure (rents and associate pay), and there is some doubt whether there is a corresponding value-add for their higher fees. At the high end, the market is pretty crowded. An international footprint is not necessarily a competitive advantage when 20+ of firms have the same high fixed costs and similar lawyer credentials. Not surprisingly, a lot of desirable legal work that does not require a multi-office international platform is migrating to firms further down the AmLaw/NLJ 250 food chain. (These observations, by the way, track Larry Ribstein’s The Death of BigLaw analysis.) Indeed, anecdotal evidence from my informal network suggests that boutiques are booming holding their own [NOTE: after the original post, three additional members of my informal network suggested that boutiques were not booming but, instead, hurt less badly].

Folks, we are in uncharted waters. The structure of the corporate bar is changing rapidly. The giants are vulnerable.

[thanks to bill henderson via cc]

Related Posts:

• Capturing the Fallout of the 2008 Economy and the Legal Field Impact
• Specialized Law Firms Team Up to Form One Stop Shop
• Why Do Young Lawyers at Law Firms Make So Much Money?
• How Technology is Making Law Firms Move Toward Flat Fees
• Interviewing at Law Firms to Be a Part Time Attorney

Full post as published by Law Vibe on December 15, 2009 (boomark / email).