Time to Lay Off Lawyers or Scale Up? Big Law Faces Staffing Quandary

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The Shift: Time to Lay Off Lawyers or Scale Up? Big Law Faces Quandary

What a difference just one year makes. At this point last year, law firms were in a hiring frenzy, gobbling up groups of associates because of a deluge of transactional work, including for SPACs, M&A matters, IPOs and real estate deals. Five or even six-figure bonuses were being offered to associates to get them to move—or stay in place without getting recruited.

With the slow down in most types of deals in 2022 however, law firms have less work on their hands. Associates at some firms—especially those with large corporate practices—are “underutilized,” as some firm leaders say. Law.com has reported on associate cuts several firms, including at Kirkland & Ellis after performance reviews and at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian. And just on Wednesday, Cooley announced it was laying off 150 lawyers and staff. Meanwhile, concerns are rising that more law firms, especially in New York, could also lay off lawyers.

Could law firms have predicted this a year ago when they were slammed with billable hours and their associates were hitting all nighters to meet client deadlines?

Probably not. It’s an increasingly delicate and difficult balance for law firms of having just enough lawyers, in between and during boom and bust times. And the stakes are growing to make sure law firms get it right.

The Conversation

The onus was on law firms a year and a half ago to staff up and make sure they had enough lawyers to meet client deadlines and commitments. That meant hiring other lawyers, rather than turning away work or putting more demands and pressure on already stressed teams. And with high attrition rates last year, law firms were also hiring to make up for vacancies.

Joe Conroy, Cooley CEO, described the quick ramp up and down phases in an internal memo Wednesday. “In an effort to service unprecedented demand and to help ease unsustainable workloads throughout 2020 and 2021, we launched an aggressive and highly successful talent recruitment strategy. Ultimately, however, our recruiting success proved to be misaligned with the unexpected economic downturn that has occurred and will likely persist well into the year ahead,” Conroy said, leading the firm to take “painful but necessary steps” in the form of layoffs.

Law firm partners already knew that it would be hard to beat 2021 productivity, but predicting a sharp slow down in corporate matters this year would have required a crystal ball. That would mean predicting a global chain of events, from the war in Ukraine early this year to soaring inflation and interest rates, among other factors that worked to slow down law firm demand. As volatility has increased, deals have stalled and clients are now delaying payments.

Of course, many law firms are not faced with hard decisions over layoffs and associate cuts. Some, including some elite firms and mid-market firms, are managing just fine, whether through continued high demand, having the right practice mix, or managing head count through attrition losses.

Still, the challenges in the industry serve as a lesson for all law firms on how to appropriately staff up and down during boom and bust times in rapid succession.

The Significance

Law firms were scarred when they scaled down too fast in the wake of the Great Recession—too many lawyers were cut, leaving firms with serious holes in their practices and ranks, problems that haunt some firms to this day. Despite the Cooley layoffs announced Wednesday, some legal industry observers say the lessons from the Great Recession have led other law firm leaders to reject layoffs for the time in 2022, mindful that dramatic cuts now can cause even larger problems later.

Indeed, the stakes are higher today: If a law firm cuts too many lawyers or staff, events can spiral even quicker than they could a decade ago. Rumors of layoffs and cuts now circulate widely online and on social media, threatening future recruiting and creating marketing challenges. And layoffs can cause even more unwanted exits, in an era of hyper competition for the best talent.

On the other end of the spectrum, if firms move too slow in shrinking overall headcount or certain practices, they could see continuing declines to partner profit. If left unaddressed for too long, firms risk unwanted lateral exits.

In an era when law firm financial statements are now so closely connected to geopolitical events and global economic trends, this means law firms have to watch their productivity and capacity more closely than ever before to make hiring and layoff decisions. Loose decisions will ultimately come back to bite law firms.

The Information

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The Forecast

Law firm leaders have already expressed concern about financial troubles in 2023. Firm leaders, in a survey, anticipate rising expenses as well as continued declines in productivity, setting the stage for a “worrisome” 2023 in profitability, American Lawyer has reported. But there are no clear predictions for next year, and some business leaders and M&A partners are optimistic about a pick up in deals next year. Many law firms will likely stick to relying on natural attrition to cut ranks, as well as a cautious hiring approach to build certain practices, less they risk more challenges in the months and years to come.

Christine Simmons is a senior editor for business of law news. Contact her at csimmons@alm.com. On Twitter: @chlsimmons.