Law firm

Big Law has a shrinkage problem

June 26, 2013: 12:38 PM ET

A mass layoff at one of New York's white shoe law firms this week underlines anxiety about the future of Big Law.

By Elizabeth G. Olson

FORTUNE -- Shudders rippled across the cloistered confines of elite law firms this week when one of the profession's storied members announced it would lay off a sizable tranche of its lawyers and support staff, and cut the pay of some partners.

Weil Gotshal & Manges's layoffs underlined anxieties over the future of the legal profession that have been stoked by the turbulent economy, technology's encroachment, and newly budget-conscious corporations -- all factors that have ramped up competition for legal slots and made lucrative positions increasingly scarce.

The 82-year-old firm's downsizing set off jitters because of its blue-chip client list, its lack of debt, and avoidance of risky practices like promising binding partner compensation. Yet more than 60 junior lawyers -- as well as 110 legal support staff -- were let go, one of the biggest law firm layoffs since firm business slid in the wake of the economic downturn.

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"I do think this action is significant, coming from a solidly established and successful firm -- my guess is that this is going to be the new normal and that many other firms will follow WGM's initiative to shed not only associates and staff but partners and to cut partnership shares," says Robert Gordon, a Stanford Law School professor, who is writing a book on the country's legal profession.

Associate lawyers, paralegals, and secretaries are scrambling for replacement jobs, while partners, who earn, on average, $2.2 million a year, according to data compiled by The American Lawyer, felt little sting. Only about 10% of Weil partners will feel a hit to their pocketbooks.

This scenario marks a shift "law firms are making to redistribute firm income upwards to eliminate the support staff and reward the partners," says Steven J. Harper, a retired law firm partner and author of the legal blog The Belly of the Beast.

Fewer young lawyers are being hired out of law school, and law firms are avidly recruiting more "lateral partners," attorneys from other firms with established clients, to bolster their revenue streams and the wealth of the equity partners.

But Harper, who recently published a book called The Lawyer Bubble: A Profession in Crisis, says that is a flawed, short-term business strategy and reflects "what ails America -- concentrating wealth.

"It started in the 1990s, when there was a surge in demand for legal services," says Harper, who was a litigator for three decades, "The firms figured they could make more, so they could take more. Now, there is a frenzy of lateral hiring by firms so desperate to buy books of business that they are overpaying."

Harper cites an independent survey of law firm managing partners that found that nearly half admitted their lateral hires only break even and do not make money for the firm. The practice also deprives junior lawyers of the chance to advance, if, indeed, they survive firm job cutbacks, he adds.

So, if junior lawyers have few prospects of succeeding at the top-drawer law firms, what happens to them? Cheaper overseas legal research and stricter corporate legal spending were already squeezing hiring and promotion prospects. Hiring of lawyers and other legal staff for temporary projects is flourishing, Volkert says.

Some wonder whether Weil's move could be the body blow that hastens the crumbling of the current legal employment structure.

"The big question remains whether the current downturn in demand for legal business is primarily cyclical or structural. I expect it's structural," says Stanford's Gordon. "There are now so many ways in which corporate clients can cut legal costs that the very expensive legal services of large law firms are going to be called for in a shrinking number of situations."

That was underscored by findings last week from the National Association for Law Placement that large law firms, which have more than 500 lawyers each, hired 3,600 new associates last year. That figure was up from 2011 but still lagged far behind the 5,100 new hires recorded in 2009.

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At the same time, a record 46,000 students graduated from law school last year. About half of them got long-term, full-time jobs requiring a legal degree, according to the NALP figures.

Even so, lawyers with three of four years of experience are in demand, says Charles Volkert, executive director of recruiting firm Robert Half Legal, particularly in the area of litigation, followed by general commercial law and health care law as companies prepare for the Affordable Care Act. He says bankruptcy and foreclosure law still offer opportunities as well as intellectual property law, particularly at high tech companies.

"The economic downturn made hiring more competitive," he says, "but lawyers should focus on internships, paid or unpaid, on hot practice areas, and on temporary assignments.

"And, one last thing," he advises. "Network like crazy."

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