Law Firm Reaction in 2009
Over ten years have passed since the legal industry has experienced a recession of the magnitude currently being caused by COVID-19. The 2008/2009 crisis did not include food & supply scarcity, physical health fears nor the logistical challenges of Shelter In Place: schools, offices, business and court closures create a unique nightmare that makes this recession worse on a number of levels. However, there are differences in how legal employers are dealing with this interruption that, depending on your perspective, could be considered an improvement from the last recession’s impact on attorneys’ careers.
2008 and 2009 saw massive associate layoffs at firms of all sizes and locations. At that time, law firms deferred new grad starts and many ultimately rescinded offers. Entire practice groups were disassembled (CMBS, Structured Finance, Commercial Real Estate for example) and that created expertise vacancies that never recovered. When certain hard-hit areas of the economy eventually began to return, legal work in those areas came back quickly, and firms found themselves shorthanded in certain practice areas. In addition, deep cuts were made of non-attorney support staff, including legal secretaries, paralegals, patent agents, marketing, recruiting, business development support, etc. Salary cuts were less common, but hours-based deferral plans became in vogue. The most alarming effect of the 2008/2009 recession was the collapse of several venerable, large law firms: Dewey LeBoeuf, Heller Ehrman, Thelen, Thatcher Profit, Wolfe Block.
Law Firm Response in 2020
While both the subprime collapse of 2009 and the COVID pandemic of 2020 were sudden, experts are predicting a shorter duration of this year’s major interruption. Various practice areas will have longer slow down periods; but unlike 2009 when the normal counter-cyclical areas did not see an influx of work, experts anticipate a HUGE surge in litigation. COVID related court filings have already begun to increase after a dramatic drop in federal filings in March. That coupled with the lessons law firms learned from the last recession show optimistic signs that this interruption may not be as severe in the long run.
This pandemic driven recession is seen as a temporary cash-flow issue with law firm collections down more than 20%. Politically and from a Public Relations perspective, layoffs during a global pandemic can be seen as harsh. Rather than massive staff and associate RIF’s, Partner-level attorneys are taking draw cuts and compensation reductions/deferrals. There is less “Right Sizing” to avoid rate issues and future recruiting and expertise vacancies – a lesson learned from the 2008/2009 recession. One major lesson being the tightening of law firms’ financial operations – firms do not give laterals large, long-term guarantees anymore, and they generally run leaner post 2008/09. Salary cuts, hour reductions, and furloughs are the method of survival this time around. Most salary or draw reductions are temporary cuts with a promise of a “make whole” bonus in the future. There have been very few complete overhauls of starting salaries, bonus plans and existing lockstep programs.
A major difference in 2020 vs. 2009 is the fact that this is a global pandemic not an economic “bubble burst” situation like the subprime mortgage crash of the last recession.
The US economy is strong and should return to a healthy state much faster. Lucas Group does not claim to be experts on the economy, but the head of the Fed Reserve, Jerome Powell, predicts that our economy will bounce back sooner assuming there is not a rebound recession caused by business shutdowns necessary to curb another major Coronavirus outbreak. Most economists’ predictions are still uncertain, but there is cause for hope that the duration of this recession will not be as severe as 2008/2009.
As of May 31, 69 Am Law firms had announced salary cuts (excluding Equity Partner comp cuts). The rate of cuts are slowing: 11 firms last 2 weeks; compared to 16 previous 2 weeks. Cuts started at firms with lower profit margins (per the AM Law 200) but have begun to take effect at the AmLaw 50 too. Federal Stimulus packages continue with the goal of keeping families and businesses solvent. This should keep consumers, businesses and firms in a better financial situation for an economic recovery sooner. Last recession, the federal stimulus money was to bail out big banks and the auto industry – this time around, the influx of government money is theoretically aimed at the consumer and businesses of all sizes.
In conclusion, there is hope that this is a shorter disruption. While our current economy and the reflective job market for lawyers is challenging, so far, the effects of this recession are not as severe as the market interruption of 2008/2009. Law firms and corporate employers of lawyers and legal professionals learned to not knee jerk and dump their talent this time around. In being strategic and holding on to their people, they certainly appear to value their employees more from a public perspective. Because firm leaders have been more thoughtful and less reactive, when this temporary challenge subsides, they are better prepared to capture the anticipated demand from a market uptick in all practice areas, and they have the talent to seek new business opportunities unique to the COVID interruption.