[New York Times] February 5, 2003 Economic Woes Hit Law Firms By JONATHAN D. GLATER
Law firms, commonly seen as islands of security and stability to their employees, are proving vulnerable to the turbulence in the economy. Squeezed between their clients and their own lawyers' wage demands in tough times, some firms are collapsing under the pressure. Big corporate clients are battling to keep costs down, while the firms' costs for lawyers, staff and technology are rising. At the same time, partners are often unwilling to accept declining pay, and they defect. "There are more firms working on radically restructuring," said Lisa Smith, who leads the merger and consolidation practice at the consulting firm Hildebrandt International. She said her business was busier than ever advising law firms trying to avoid collapse, adding that there had recently been a number of desperate "last-ditch efforts" at mergers intended to stave off law firm implosions. "We're seeing a rash of them right now," she said. The most spectacular collapse came last week, when partners at Brobeck, Phleger & Harrison, a prominent San Francisco Bay Area firm, decided to wind down the firm's business. On Monday, Skjerven Morrill, a 67-lawyer firm in San Jose, Calif., specializing in intellectual property law, announced that it would dissolve. In December, Hill & Barlow, a 107-year-old Boston law firm, said it would dissolve after a group of real estate partners indicated that they planned to defect. This is not the first time that lucrative work for big companies and investment banks has dried up. But gradual changes in the practice of law have made law firms more vulnerable today than they have been in years, according to lawyers and their consultants. Many firms have become highly specialized and do not have, for example, the bankruptcy business to carry them until the economy picks up again. Law firms' problems generally become evident early in the year as partners learn how much money they made the previous year and how much they will probably make in the coming year. If both figures are declining, some partners invariably begin to look for greener pastures; several partners jumped ship from Brobeck over the last year after the firm's decline became apparent during 2002. "They'll jump for money," said Ward Bower, a principal at Altman Weil, a consulting firm that advises law firms. "Twenty years ago, they wouldn't. That injects volatility into the marketplace." At Hill & Barlow, a group of real estate lawyers announced their intention late last year to join another firm, said Robert A. Bertsche, a former partner. "There have been times when one department has been stronger and another department has been weaker," he said, but partners would remain loyal. "They were different times. And maybe they were different people." When partners defect, Mr. Bower said, the firm still faces leasing and personnel costs, but with fewer lawyers to bring in revenue, squeezing profits. The weak economy has the same effect, driving down compensation and leading more partners to abandon ship, Mr. Bower said. Firms that relied heavily on slipping sectors of the economy - technology companies, in Brobeck's case - have found the climate particularly harsh. Brobeck shed nearly a third of its lawyers last year, before deciding last week to cease operating as a single firm. Conventional wisdom held that law firms could weather economic downturns by relying on business lines like bankruptcy and civil litigation that tend to increase in bad times. But in the late 1990's, not all firms kept their staffs or their clientele balanced, leaving them without bankruptcy lawyers to subsidize the stock-offering gurus whose work is now less in demand. "The countercyclical practices for the most part are not evenly distributed," Mr. Bower said. Firms with big bankruptcy practices, like Weil, Gotshal & Manges of New York - which is representing Enron, among others - are very busy. But other firms with little bankruptcy expertise are experiencing a tough year, he said. Law firms generally carry more debt today as well. Brobeck, for example, is reported to have had tens of millions of dollars in debt, and that obligation was a significant factor in the decision to wind down, partners said last week. In statements, Brobeck's lawyers also attributed the firm's demise to the failure of merger negotiations with a larger firm, Morgan, Lewis & Bockius, which has big offices in New York, Philadelphia and Washington. Such merger efforts are more often evidence of a firm in trouble than the cause of its difficulties, Ms. Smith, the consultant, said. A more likely culprit is the steady increase in law firms' costs. The prices of long-term leases have increased, and some firms, like Brobeck, planned on space for many more lawyers than they have. Brobeck shrank to about 500 lawyers last week from 900 lawyers in 2000. In addition, the cost of computers and other technology used by firms has doubled every three years since 1983, Mr. Bower said. And salaries for associates and for support staff soared in the late 1990's. The legal industry also continues to consolidate, creating more and more huge firms with 1,000 or more lawyers. Such firms have offices in more locations, making it easier to serve multinational clients, said Steven M. Polan, whose 45-person New York firm of Kalkines, Arky, Zall & Bernstein recently combined with Manatt, Phelps & Phillips, a 285-lawyer firm based in Los Angeles. "We were thinking bigger and thinking about being able to practice on a national platform," Mr. Polan said. "A 45-person law firm was not a size that seemed to be a growing presence in the marketplace." Larger firms generally mean higher billable rates to their clients because law firm combinations do not yield economies of scale, Mr. Bower said. Overhead costs do not decline after such mergers, he said. Nevertheless, merger activity among law firms has continued. Although the number of mergers declined in 2002 from 2001, the size of the merging firms increased. Hildebrandt reported 53 law firm mergers in 2002, down from 82 the previous year but up sharply from the mid-1990's; there were just 11 such mergers in 1997. "By contrast to the corporate world, law firm mergers have been pretty consistently high and at a much higher level than they have been in the past," Ms. Smith, the consultant, said. "It's starting to have a real impact on the shape of the legal market in some cities."
