For Big Law, 2008 may prove a smaller year.
After several years of rising revenue and profit and all the accompanying salary wars and ever-higher client rates, the nation's largest law firms are bracing for a period that might not be so flush.
"Firms will see their work slow down this year," says Regina Pisa, chairman of law firm Goodwin Procter LLP. "There's no question about it."
Already, the credit-markets malaise that has cut the pace of private-equity, real-estate and structured-finance deals is giving some lawyers more time to spend with their families. Other areas of the law business, like subprime-related litigation, are injecting activity. Still, it is unclear whether that new business will make up for the lost revenue elsewhere.
"We have an uncertain environment for revenue growth in 2008, and that is the kindest thing I can say," says Dan DiPietro, who works with large law firms as the client head at Citi Private Bank Law Firm Group, part of Citigroup Inc. (NYSE: C). That group's research on mostly large law firms, as measured by revenue, shows that their average annual revenue grew more than 10 percent and annual profit per partner grew nearly 10 percent from 2002 to 2007 (based in part on estimates for last year).
At Goodwin, mergers-and-acquisitions work "has slowed down markedly compared to last year," says Pisa. WilmerHale's legal work for initial public offerings of shares is down. At Orrick, Herrington & Sutcliffe LLP, the firm's major practice in securitizations, or the packaging of mortgages and other loans into securities, was less active in the second half of last year. Reed Smith LLP says it has experienced a slowdown in real-estate finance work. Even Latham & Watkins LLP, which said revenue rose 23 percent in 2007 to a record of more than $2 billion, has said last year's second half had a slowdown in certain finance segments, including M&A.
Law firms "are very much participants in the broader economy; we're very influenced by what is happening in the world," says Greg Jordan, global managing partner at Reed Smith.
Announcements of layoffs of lawyers have been relatively sparse. While big law firms in recent years boosted associates' pay at this time of year, there haven't been reports of that so far this year.
Law firms say they are seeing promising opportunities amid the market turmoil, from representing companies in subprime litigation and investigations to advising foreign investors in deals. Many note that their diversification, both in terms of practice areas and world-wide geographic breadth, should mean that they will be well positioned to weather economic woes or even thrive.
But although the conventional wisdom is that the law business is steady in up markets and down, people who study the industry aren't upbeat about the near term.
A recent report by legal consulting firm Hildebrandt International Inc. and Citi Private Bank, based in part on financial data furnished by nearly 250 law firms, predicted a slowdown in revenue and profit growth this year and was Hildebrandt's first "downbeat" client advisory since the late '90s. The report called current conditions a "perfect storm" for law, noting that litigation and bankruptcy aren't yet trending up the way they are expected to do in tougher economic times.
Some lawyers confirm that observation, at least in certain geographic and practice areas. Litigation, they say, is down in Texas, partly because of efforts there to limit plaintiff recoveries. More broadly, before the subprime problems, shareholder suits were declining because of factors such as corporate-governance legislation, lawyers say. While many lawyers expect bankruptcy work to gain steam, it has yet to yield big fees, partly because many companies that were able to borrow on favorable terms in recent years haven't yet had to refinance their debt.
Though several lawyers say the perfect-storm cliche overstates the situation, they acknowledge that the outlook is cloudy. "We all suspect that there will be initial cutbacks mandated by corporate boards across-the-board in terms of expenditures," says William Perlstein, co-managing partner at WilmerHale. And where legal services "are viewed as discretionary, they will be postponed."
Law firms, in turn, are being conservative where they can. At Greenberg Traurig LLP, shareholders -- the firm's equivalent of partners -- are holding their base salaries steady for now. "We, like our clients, control our costs, all of our costs, during a period like this," says the firm's chief executive, Cesar Alvarez. He has urged lawyers to bill clients in a timely fashion and to stay vigilant about avoiding law-firm expenses that don't add value for clients. "A fancy dinner and expensive wines and things that lawyers sometimes do, do not increase the service to the client," he says.
Last year, WilmerHale kept its associate head count flat, which meant the firm didn't always fill jobs when attorneys left. Going into 2008, "we are being cautious in terms of how fast we hire, in deciding what initiatives we undertake, in being careful in terms of committing to real estate," says Perlstein. "We are approaching the budget process with ... a very different mind-set in terms of being prepared for and able to respond to a falloff in demand, which is certainly a different mind-set than a year ago or two years ago."
McCarter & English LLP set its hiring targets for this year conservatively, according to Chairman Drew Berry. At Proskauer Rose LLP, Ron Papa, chairman of the corporate department, says that work has stayed steady and his group is always on the lookout for strong potential recruits. But the group isn't hiring in a major way. He says he is monitoring the productivity of current staff, from tracking demand for associates through the firm's work-assigning system to "walking the halls" to see "who's working at night and on weekends."
One nice side benefit to a slowdown is less time at the office. At Goodwin, says Pisa, some people "were too busy a year ago." Now they're working at a normal pace, she says. "That's refreshing, for most people."
Ashby Jones contributed to this article.