Will 2008 Be Law Firms' Worst Year Since Early 1990s?
Fasten your seat belts. A difficult economy has cut partner profits and associate attrition, while increasing expenses for major U.S. law firms, creating “a dramatically different economic environment from the previous seven years,” an expert says.
Law firm revenue in the U.S. is growing at the slowest pace since at least 2001. And, because many firms are continuing to add lawyers to their attorney rosters despite a drop-off in legal work, productivity is slowing, says Dan DiPietro, who oversees law firm client relations at Citigroup Inc.’s Citi Private Bank, in an article he authored for the Am Law Daily. The bank compiles data from its many law firm clients and reports on economic trends based on this research.
Law firms saw average profit per equity partner drop some 9 percent in the first half of 2008, he writes in the lengthy article. Meanwhile, expenses rose by about 10 percent, pushed up, in large part, by increases in associate pay.
The second half of 2008 won’t be any better than the first half, DiPietro predicts. And it could be worse—“the common wisdom is that this economic slump is more akin to the downturn of 1991.”
But there is a silver lining, he writes: Financial pressure will likely encourage partners to watch expenses more closely and winnow out unproductive attorneys. He also urges law firms to start focusing now on year-end collections.
Eliminating lockstep pay raises for associates would go a long way toward alleviating law firms’ current financial issues, Dipietro says in a Legal Week article last month that he authored.
Another good move would be to reduce associate bonuses, yet it is uncertain whether law firms will do this, DiPietro writes in the Am Law article. “The rational approach would be to pare them back, but, while lawyers display rationality and dispassion in the practice of law, they have exhibited ‘irrational exhuberance’ on this issue in the past.”
Related coverage:
ABAJournal.com: “Credit Crunch is Limiting Partner Draws”
