Buffalo Law Journal
By Caroline Bala Brancatella
Some are referring to it as “Black Thursday,” others as “The Valentine’s Day Massacre.”
On Thursday, Feb. 12, an estimated 1,000 people in the legal industry lost their jobs when several major law firms announced layoffs of both staff and attorneys, adding to months of job cuts at firms that once seemed invincible.
Word of such losses came on the heels of the local news that Buffalo-based Hodgson Russ LLP issued layoffs for the first time in its 192-year history, letting go of five attorneys and eight staff members. Nixon Peabody LLP, a national law firm that maintains offices in Buffalo and Rochester, also announced it was laying off 36 people, including 20 attorneys. Neither firm specified which of its offices were affected by the layoffs.
Legal gossip blogs are infatuated with alerting readers to news of lawyer layoffs, declining partner profits, salary freezes and delayed start dates for new associates, as well as severance-package details.
Associates in the first few years of practice are the attorneys most likely to read blogs that report little else but job losses, and they are also the firm lawyers most susceptible to such layoffs. Paranoia often results.
But does the national reporting portray an accurate economic picture of the situation facing “regional” law firms such as those in Western New York?
Saturation Coverage
There are now entire Web sites dedicated to cataloging and analyzing the epidemic of law-firm layoffs.
Vault.com, an online provider of employment information in a variety of sectors, including law, now maintains a page entitled the “Layoff Tracker.” Its layoff outlines across all businesses include the name of the company, its location, the number of employees dismissed and the percentage of the company’s total workforce let go.
For information specific to legal job losses, masochists can visit AmericanLawyer.com’s “Layoff List,” which keeps a catalog of major firms that have implemented layoffs, and provides links to news coverage with details of those losses. For those who want details and visuals, Lawshucks.com, a legal tabloid, provides charts and graphs that analyze and crunch the numbers so that associates know that their firm is laying off a lot more people than other firms are.
These sites and the better-known blogs that report on legal culture primarily focus on large New York City law firms, with frequent reporting too about the goings-on of Washington, D.C., Los Angeles, and Chicago offices. And rightfully so, as those cities’ law offices are epicenters of national and global legal activity.
Nonetheless, such coastally centered coverage leaves large segments of law practice throughout the United States undiscussed and unanalyzed. Legal blog reporting, particularly related to the economic outlook of law firms, may not be helpful or relevant to attorneys working in more regionalized markets, and the firms there that rely on a client base very different from a global financial center like New York.
Credit-Crunch Spinoff
Many of the recent financial woes of large law firms stem from the “credit crisis” that has been driving the downturn of the economy for the past year and a half. This is because a great deal of recent corporate practice in the financial centers has focused on asset-backed securities, credit-swap derivatives and the byzantine — and in some cases questionable — financial transactions that surrounded them. Entire practice groups based on such financial tools have vanished.
The good news is that the end of the era of securitization as we know it does not affect regional legal practices such as those in Western New York quite as drastically. For the most part, Buffalo-area law firms never engaged in such transactional work. Local firms do have diverse and active corporate practices, but they are based on more traditional forms of business — real estate, contracts, etc. — than the largely theoretical finance that larger firms have engaged in during recent years. While an economic down turn usually leads to an uptick in litigation work, it simply has not been enough to make up for the losses.
Since the practices and revenue related to such financial footwork dried up in megafirms over the past 24 months, layoffs are the quickest and most effective way to lessen financial blows, simply because personnel costs are the most significant expense for law firms.
Jim Cotterman, a principal at the national legal consulting firm Altman Weil, lays it out: “The cost structure of a law firm is 78 percent labor, 8 percent facility and technology and 14 percent other. The facility and technology costs are largely tied to leases and contracts that will not be easily broken … Let’s face it, law firms are labor-intensive. That is where the money goes, and that is where the savings are.”
Local Outlook
Is the blogs’ sense of hysteria warranted in areas outside the financial centers? Are more layoffs on the way in the Western New York legal community?
Possibly. According to Cotterman, how each legal market fares in a rocky economy mirrors how that geographic area is weathering the downturn. For this reason, Western New York’s legal community may, for the moment, be in a better overall position than many other places.
The area’s economy has been in decline for decades, and the local legal field has adjusted to the shifting needs of clients. There is a theory that individuals and families who have always struggled financially fare better in times of economic woe because they already know how to weather a storm and make adjustments. The same may be true of a place like Buffalo, where residents are in the habit of adjusting to bad financial news.
Juxtapose Buffalo to Charlotte, N.C., which in recent years has been referred to as “Wall Street South” because of the number of financial institutions that have set up shop in the area. The Carolinas have been seen as a haven for Buffalo refugees in search of better weather and better financial opportunities.
Many Charlotte law offices have not merely laid off lawyers, but closed all together. Additionally, the real estate market in the Carolinas has been as hard hit as anywhere in the nation. Although there are signs that it is starting to slow along with the rest of the nation (home sales were down 17 percent in January compared to last year), Buffalo’s real estate market remains one of just 18 in the country where home prices increased last year.
Big Overhead = Bigger Risk
Another factor that may contribute to law-firm financial troubles in the bigger markets is that the larger the law firm, the more debt it is likely to carry. While the larger local firms may carry some debt, it is likely not significant as at larger firms, and therefore not as dire a problem as it could be in this tight credit market.
“Overall, 23 percent of law firms are debt-free,” Cotterman says. “About 30 percent of law firms with 20 or fewer lawyers and about 8 percent of law firms with over 150 lawyers will be debt-free.”
The no-frills approach of many local firms also helps keep the “people costs” that eat up so much of a firm’s budget at bay. The New York firms entice lawyers with starting salaries of $165,000, performance bonuses, clerkship bonuses, laptops, PDAs and smartphones, dinners, parties and all the trappings of prestige. Local firms tend not to engage in such antics, a money-saving decision that is serving them well now.
But when it comes down to it, the economy everywhere is rough, and Western New York is experiencing a new round of economic hits. Local law firms will likely feel some of that, but may be able to avoid slashing and burning their workforces. In the end, each firm needs to look at its situation and, above all, address the needs of those who pay the bills — the clients.
“Law firms need to stay close to their clients, appreciate their clients’ challenges, and assist them as much as possible,” says Cotterman. “Not raising rates or raising rates much more modestly can help. Work with the clients to find more efficient and effective ways to provide the services — hopefully such that the firm and the client can make progress.”