Worker Roulette?

Local attorneys sit tight, await recession's end

Back Longreads Feb 1, 2011 By Anne Gonzalez

Many outsiders watching the Capital Region legal scene may feel like they need a scorecard to keep track of attorneys. But, save for a few notable shifts and a historic closure, local lawyers are following suit of other businesses in a recession: hunkering down and staying put.

Law firms, especially those focusing on business and real estate transactions, felt the fallout of the economy the past two years. Cost-cutting measures at large firms meant changes in caseloads and hiring, recruiting and training trends. Meanwhile, partners are cross-examining their core business models and client billing practices.

In general, Sacramento’s law offices followed the national trend of less employee movement, fewer complicated cases and negotiation of lower fees.

California’s severe recession, fueled by the mortgage meltdown, state budget cuts and furloughs, made Sacramento’s legal landscape even rougher, some say. The shuttering of longtime law office McDonough Holland & Allen PC also cultivated uneasiness in the local market, which led to limited mobility among lawyers.

“My impression is, lawyers are not moving around a lot,” says Angela Schrimp de la Vergne, a partner in Knox Lemmon Anapolsky & Schrimp LLP in Sacramento. Her small firm of nine attorneys lost three associates in the past year, but not to other local firms. Instead, they or spouses had to relocate.

“If attorneys have good jobs right now, they’re holding on to them,” Schrimp de la Vergne says.

That mirrors a national trend, according to Joe Altonji, managing director with HBR Consultants in Chicago. He says legal practices across the country are just now pulling out of a 30-month slump caused by the recession.

“Ever since (the bankruptcy of) Lehman Bros., the law industry has been coming out of a funk,” Altonji says. He says the first few months following the financial meltdown were devoted to cutting costs.

Jeffrey Koewler, managing partner at Downey Brand LLP, concurred that law firms are reducing costs to maintain profits. He recently attended a national conference of managing partners from 22 law firms, where the main topic was the economy and slashing costs.

“Every one of them have gone through cuts and have been affected by the economy,” Koewler says. “Everyone in Sacramento I know of has gone through cost cutting.”

Downey Brand, founded in Sacramento in 1926, is Sacramento’s largest law firm with 120 attorneys in five Northern California cities.

Practices hardest hit by the recession were business transactions, especially real estate sales and development, and mergers and acquisitions, Altonji says.

Schrimp de la Vergne previously focused on real estate transaction law, a market she says is “just gone.”  

“My business was 80 percent transactional 10 years ago, and now it’s 80 percent litigation,” she says. Her real estate business has dropped by 70 to 80 percent the past two years and is now relegated mainly to landlord-tenant lease agreements and commercial buildings purchased from foreclosure.

Schrimp de la Vergne’s business was also affected by state employee salary cuts and furloughs. When retail and restaurants were hit by a slowdown, she saw a commensurate cutback in her client base and amount of cases.

“If you cut salaries to state workers 10 percent, they don’t go out to lunch,” she says. “Some of my downtown business clients with state employees as their customer base didn’t even open on Furlough Fridays.”

Bankruptcy lawyers, on the other hand, saw their hours jump by 20 percent on average since 2008 in some regions, Altonji says, a spike that’s softening now. Litigation, previously thought to bail out a law firm during tough economic times, was flat overall, he says.

Law firms not only had to diversify and shift to other legal areas, they had to adjust to a change in the kind of cases. Jim Miller, shareholder for Sacramento’s Powers & Miller, noticed his firm’s insurance clients sent a smaller number of cases recently, but they are more complex.

“The smaller cases are not being sent to us because insurance companies want to contain costs,” says Miller, whose firm deals primarily with personal injury cases. “Their in-house legal teams are handling the less complicated cases.”

Schrimp de la Vergne also notices a drop in her firm’s discretionary work, such as business counseling. She notices that her clients are coming to her with more urgent legal actions and holding off on long-term strategizing.

Another trend is that clients are looking to hold the line on legal fees and increases. In some instances, law firms are being asked to do some kind of alternative billing, flat fees or a discount for a year or two, Koewler says.

“We’re seeing these requests from Fortune 500 corporations that are healthy, but not making as much as they would like,” he says. “They’re telling us they’re experiencing some difficulties, and we’re willing to make accommodations for that, to keep the relationship.”

Staffs that beefed up during bull markets were trimmed in the past two years with partners and associates getting laid off, sometimes quietly, Altonji says.

“During this period, firms tried saving their best people and cut the weakest, but sometimes that was hard to tell,” he says. “In the associate ranks, virtually no one quit their jobs for any purpose. The retention strategy for firms was, you show up and you get a paycheck.”

He says there was also limited lateral movement of partners.

“Taking unnecessary risk wasn’t a good thing,” Altonji says of the recent market. “It’s not been a good time to jump from firm to firm.”

Altonji says there were some exceptions to attorney movement patterns, the most significant was “in the ranks of very good partners with important clients.” Lawyers who had good clients but were mismatched with the firm’s primary focus tended to look around more. With clients focused on pushing down costs, many lawyers who felt they were at the wrong firm jumped from large firms to midsized firms, those with 100 to 200 attorneys. Successful firms recognized the mismatching of star lawyers to the type of practice and made adjustments to the business model.

Other moves were the result of lawyers worrying their firms wouldn’t survive.

“For a period of time, the most important thing a firm could do was maintain health,” Altonji says. “Attorneys were worried they wouldn’t get paid, or clients might get scared off. Lawyers are relatively insecure anyway, so if they’re nervous, they can jump around.”

One of the biggest jolts to the region’s legal market was the September 2010 closure of McDonough Holland & Allen, the second-largest law firm in Sacramento. Founded in 1953, the firm was a mainstay in the Sacramento market. Virtually all of the firm’s 75 lawyers found other jobs, but many of the 90 administrative staff employees were left without.

“When MHA (McDonough Holland & Allen) imploded, it created uncertainty in the market, even though most of the lawyers found jobs,” Schrimp de la Vergne says. “The administrative staff got hurt. It makes everybody nervous.”

The shutdown became a cautionary tale of what happens when too many top producers and rainmakers leave a firm at once, exacerbated by the poor economy and high overhead. The firm had 99 lawyers in March and signed a 15-year lease for 68,000 square feet of Capitol Mall space. By the end of the month, 10 of its health care lawyers left for the Sacramento office of DLA Piper, the biggest legal split of the four-county region in a decade. Another 10 all-star attorneys were picked up by area firms, including Stoel Rives LLP, Weintraub Genshlea Chediak Law Corp. and Boutin Jones Inc., which added 18 MHA lawyers to its 25 lawyers, catapulting it from the 11th-largest law firm in Sacramento to the No. 4 spot.

Since health care was one of the stronger practices during the recession, the departure of senior counsels in that division gutted MHA’s income, some speculate. Faced with huge lease payments and decreased revenues, the firm had no choice but to dissolve.

While the recession has presented challenges to the law industry, one positive byproduct is a more consistent employment landscape.

“We have more strength and stability in our firm now than when things were great, because there are less opportunities for partners to move around,” Koewler says.

Partners typically require a pay increase of $150,000 to $200,000 to move to another firm, Koewler says, which is a hard sell to existing partners in a down economy.

Law firms have cut down on hiring, while pay has stayed relatively flat, Altonji says.

“There wasn’t a lot of reason to pay a lot of money because nobody quit,” he says. Nationally, partner pay was flat or a 5 percent cut in 2009, and it inched up as much as 5 percent in 2010, Altonji says. Many firms are also adjusting pay structures so top producers bringing in more revenue make proportionately more than behind-the-scenes or low-producing counsels.

It replaces a more egalitarian business model that shares pay more evenly among partners.

“There were a lot of overpaid service partners in the past,” Altonji says. “Now there are bigger spreads from the bottom end to the top end of partnerships at large firms, and that model is now extending to smaller firms. In typical firms, there’s greater diversity between partners’ pay, even though the average will stay about the same. Socialism is great until you run out of other people’s money.”

The shifting business models and tumult in the industry has transformed hiring and training of lawyers. Traditionally, large national firms hire young attorneys right out of law school, work them hard and train them, Altonji says. The cost of training younger lawyers was passed on to the client in the old structure, and the lawyer would often leave the firm for a smaller group within three years.

“That died with the recession,” Altonji says. “There’s been a shift in the larger firms away from that lockstep model and toward a more competency-based structure. There’s a recognition that firms can’t assume clients will pay to train young associates for $400 an hour. Partners are more expensive, but they get things done quickly. There’s a lot more focus on getting it right the first time.”

The newer business model requires fewer lawyers freshly minted from law school. National firms that used to hire a class of 300 graduates are hiring half of that, which means young attorneys are going directly to small and midsize firms.

In the past couple years, Schrimp de la Vergne says she has been overwhelmed with as many as 200 applicants for a single position at her firm, many of the candidates younger, more inexperienced or candidates that don’t fit her needs. Miller also has seen a dramatic uptick in attorneys applying, as much as 10 to 20 times the applicants from two to three years ago.

Lawyers are seeing a bit of light at the end of the tunnel. Schrimp de la Vergne says real estate transaction business in the past three months has finally reappeared, and Miller added two lawyers to the office in the past year.

“It’s no longer Panicsville,” Altonji says. “There are some improvements in the marketplace. Most of the big cuts are done, and firms are starting to make strategic decisions again.”

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