Redwood Analytics

Rob Millard's blog Adventure of Strategy takes a second look at recessionary pressures against law firms in 2008. He links to a new Client Advisory from Hildebrandt and CitiBank that is a depressing read.

According to the Advisory, 2007 started out with high expectations and ended in uncertainty. Litigation doesn't look as good since some companies appear to be settling out of potentially protracted litigation. Merck was used as the example with their recent announcement that they were settling their Vioxx claims. (Of course, news yesterday that Merck is back on the defensive may dampen that bleakness and provide hope for trial attorneys on both ends of the aisle.)

The Advisory warned of the "perfect storm" in which finance, transactional, and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself.(p 2)

Breaking down the reasons for their bearish outlook:

• The cost of leverage. The Advisory compares the economic downturn of today and 2001 and notes that the relatively high level of equity partners in 2001 in firms allowed for the use of leverage to increase profits. De-equitizing partners and increasing the barriers to equity partnership have left firms with little wiggle room to work in this economic downturn. This may be true for large firms, but it certainly isn't the case for mid-size firms who are still very much top-heavy according to the 2007 Law Firm Economic Survey from LexisNexis. If leverage was a method of bailout for large firms in the economic trough in 2001, then mid-size firms stand to profit from utilizing it in 2008. This pre-supposes firms have the will to make the admittedly difficult decisions in the more personal environment of the mid-size firm. It stands to reason that a struggling business that wants to survive will make the hard decisions to prevail in hard times. Interestingly, the Advisory argues the negative impact of increasing leverage in the firm that may necessitate a revisit to this subject. In our surveys, increased leverage has been correlative to increased income. Is the Advisory making the argument that you can be over leveraged? Is utilization of associates not the only factor?
• Realization Rates. Realization rates are lower now than in 2001, placing additional pressure on increasing rate. Which leads to the next point -
• Client push back. Clients, in spite of firm predictions of increasing rates, are placing price pressures on firms that place a premium on firms who are efficient at providing legal services. That, combined with lower realization rates, hurts profits.
• The Challenge of Laterals. There are more lateral hires now than in 2001. According to the Advisory, laterals are the first to leave the firm when hard times hit. Perhaps for similar reasons, perhaps not, respondents to the LexisNexis 2007 Survey confirmed that they have more success with new hires than with laterals.

• Lack of Offsetting Practices. It's the "perfect storm" of no transactional, litigation or finance work (although I personally think that may be a bit overstated).

Is this a pre-warning? Click here to read the Advisory in its entirety.

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