The legal industry is undergoing dramatic changes due to the COVID-19 pandemic. Law firms are operating remotely; lawyers are working from home; summer programs will be dramatically changed if not canceled altogether; states have postponed administration of the July bar exam; and there is uncertainty over the 2020 entering class into law firms.
The legal industry is not the only target — just about every segment of the economy has been negatively affected — and there is no clear end in sight. To survive, law firms will have to take measures to shore up their finances and mitigate the economic impacts and uncertainties of the coronavirus pandemic. Associates might be a target as firms seek to cut costs, but instead of laying associates off, firms focused on being in the best position when the economy recovers should con-sider retooling and repurposing associates.
The Flaws of Layoffs
Some law firms have already responded by resorting to associate layoffs. With the “Cravath” salary scale bumping first-year associates’ salaries to $190,000 in June 2018 and healthy mid-level bonuses topping out at almost $100,000, this option can be effective in reducing a large fixed cost quickly. However, with the economy potentially rebounding on a dime, layoffs have three inherent flaws: (1) This does nothing to help firms address needs that have arisen due to newly busy practice areas; (2) it may significantly hamper a firm’s ability to recover through lateral associate hiring in the future; (3) and, most crucially, this handicaps the profitability and strength of a firm once practices in which they have laid associates off become busy again.
Addressing pressing lateral associate needs is difficult to accomplish quickly right now. The practices we have seen heat up and that we expect to remain busy are ones in which there is a dearth of associates that could lateral from another firm. For example, the bankruptcy, insolvency, and restructuring bars tend to be quite small yet many firms have posted bankruptcy needs over the past several weeks. In addition, while firms have become adept at interviewing and have even shown they can make hires going through a process that is completely remote, many associates are wary to make a lateral move in such an uncertain environment. Associates also buy into the false notion of “last in first out,” which cautions them to stay put.
Because a looming recession has been on associates’ minds for some time, whether firms resorted to lay-offs in 2009 and how deep those cuts were has been a factor during associate lateral moves over the past 10 years. This fact is going to be given much more weight in light of the generational differences between current associates and those who survived the Great Recession. We know that Millennial and Gen Z associates value loyalty: They want to believe they are valued members of their firms and to see their firm’s investment in them and their well-being. Firms that now choose to protect their associates instead of laying them off will fare much better in the lateral hiring market in years to come.
During the last recession, firms cut too deep. When the economy rebounded, law firms across the country did not have enough mid-level associates in the corporate, finance and real estate ranks (those practices that had been decimated in 2009). Law firms clamored to hire well-trained, mid-level associates pretty consistently from 2014 to 2019 — and there were not enough to fill the lateral needs. A better supply could have led to better leverage and more profitability for firms over those boom years.
The Value of Retooling
A solution to the perils of layoffs is to retool and re-purpose associates from a less busy practice to a more active one. Retooling allows firms to keep their best associates, might prevent layoffs, and could potentially help to fuel busier practices. Retooling requires a law firm to invest a great deal of time in retraining associates who have already been trained in a particular practice. It also makes it harder for a firm to justify an associate’s current billable rate when he or she has been practicing for some time but then switches practices because there is an expectation that an associate at a certain level has a specific set of skills. Firms might think about the impact of adjusting these associates’ compensation accordingly. Retooling is not easy, and some firms do not have the capability and flexibility to retool their associates. However, lawyers are trained to be adaptable, so firms will likely want to keep their talented associates who have proven themselves — they will likely be successful regardless of their practice. Retooling anticipates an eventual certain rebound and puts law firms in the best position to get ahead when it happens.
The uniqueness of this situation as a health and eco-nomic crisis has sparked work in several areas for lawyers. In the near term, firms will be busy with work in insolvency, restructuring, and dispute resolution. There was a decade-long boom in regulatory investigations, arbitration, and other disputes after the financial crisis of 2008. We will likely see a similar pattern with COVID-19: Failing businesses will need rescuing, contract defaults and unpaid claims will need resolution, and fraud will need investigations. Intellectual property rights and regulatory work related to newly developed diagnostics and therapeutics due to COVID-19 are requiring extra attention in uncharted waters. SEC-listed companies also need advice on their reporting obligations, and there will likely be an outpouring of shareholder litigation around the stock drops. With employees working from home, organizations are concerned with data privacy as employees are accessing confidential materials remotely and often on their own equipment. And real estate lawyers are in demand to renegotiate leases with companies that are losing revenue. Why not take the time to retrain talented attorneys in an area that is currently booming?
Even though nobody knows exactly when the economy will rebound, we know that it will. While private equity deals have all but come to a screeching halt in the last few weeks, as we saw after the Great Recession, the combination of locked-up investor capital and hunting for bargain opportunities proved to put that practice into overdrive in the years following recovery. We will likely see this pattern repeat itself. And even though it is soft now, there will also likely be a swift rebound in M&A (mergers and acquisitions) because big businesses look likely to emerge much stronger than smaller rivals. They will have the heft to expand market share, buying up weakened competitors and profiting from distressed asset sales. Given that private equity and large M&A transactions are primary drivers of big law firm revenue, better to hold on to the talent that can deliver quality work for major private equity clients and large acquirors to capitalize on the super-sized revenues and deal flow.
Some firms have started the retooling process already, offering training in restructuring and insolvency to all their corporate associates firmwide. Law firms are businesses, and ultimately pivoting and training associates to utilize them in different ways will help to put these firms in a much better economic position post-recovery. Those with the nerve and balance sheets to think ahead will be the firms that will thrive in the long run.