By Elizabeth Olson, NY Times
America’s law firms, even the most prominent, are mired in an era of noticeably modest growth and volatility in the industry, and 2017 promises to be no better.
Fierce competition is prompting firms to take unusual steps to bolster their profiles. Top firms are hiring groups of lawyers to expand specific practice areas, changing pay practices, jettisoning or demoting some partners and staff members and seeking ways to distinguish their brands to set them apart from competitors.
Beyond that, the top-drawer firms are increasingly jostling with one another to win lucrative legal work. It is getting tougher for firms to hang onto traditional portfolios of corporate business and avoid elbowing from rivals.
“It was a growth story in the 1990s, but since 2008, it’s a more competitive world where there is less growth,” said Jeffrey C. Hammes, the chairman of Kirkland & Ellis, a major Chicago-based firm with some 1,800 lawyers worldwide.
The traditional bonds of partnership, if not being undone, are at least being frayed by the rising numbers of partners leaving one big firm for another. Kirkland, for example, last fall brought aboard Paul D. Clement, a former United States solicitor general, and all 17 colleagues from the boutique appellate firm Bancroft P.L.L.C. The bold stroke gave Kirkland singular depth in a prestigious practice area, but may also have had unintended fallout.
Since that deal, announced in September, Kirkland’s latest overhaul of its partner compensation system — where average profits per partner are about $3.6 million, according to reports in legal publications — took what some see as a surprise twist. The revamp appeared to shift higher awards to lawyers who handle corporate work, the reports said, leaving some litigation partners to complain privately that their work was being undervalued. Mr. Hammes did not comment on the pay shift.
In the past, recruiting a superstar to jump to a new firm was rare, and a few top-of-the-line firms still avoid such hires on grounds that they undercut the profession’s image and damage morale. But unexpected moves like Mr. Clement’s hiring are becoming a new normal for law firm viability as firms poach illustrious lawyers in a quest to raise their profiles, and revenue, according to those who study the legal industry.
Last year, Kevin Arquit, a business competition specialist, left Simpson Thacher & Bartlett to become head of an antitrust legal team at Weil Gotshal & Manges. He joined a former colleague, Steven Newborn. And Scott A. Barshay, one of the best-known mergers and acquisitions specialists, who had 25 years at the premier firm Cravath, Swaine & Moore, jolted the legal community by leaving. His new home is another top-flight firm, Paul, Weiss, Rifkind, Wharton & Garrison, with its leading merger and anti-activist shareholder practices, where he became its global head of mergers.
A “strong distinct brand is vital to the most successful firms,” said Gretta Rusanow, the head of advisory services at Citi Private Bank Law Firm Group, which recently examined the performance of a group of about 50 large firms from 2010 to 2015.
Being the leading experts and trusted advisers “in a select number of practice areas and, increasingly, industry sectors enabled them to attract higher rates,” she said, “and higher rate increases as clients have been prepared to pay comparatively more for what they perceive as high-value legal advice.”
Mr. Barshay’s former employer, which reportedly paid him about $3.4 million annually, embraced the traditional “lock step” system of pay by seniority, designed to cement loyalty and camaraderie among partners. But Paul, Weiss and some other platinum firms offer higher pay because they tie compensation to the amount of legal business a partner generates for the firm.
Firms are also increasing financial incentives for their lowest-ranked lawyers. Cravath, Swaine & Moore led a wave of firms in June to increase salaries of first-year associates to $180,000, but it did not raise year-end bonuses for associates from 2015 levels. Higher salaries come as corporate merger activity dropped 22 percent over the same period last year, according to Thomson Reuters.
Law firm spending outstripped demand in the first three fourths of last year, according to an annual review by Citi and Hildebrandt Consulting. Expenses, including last summer’s junior lawyer pay raises, rose 3.4 percent while demand for law firm services grew a mere 0.3 percent. Law firms were able to offset that imbalance by charging higher rates, up some 3.2 percent, bringing overall growth through September to 3.7 percent.
Firm mergers are also expected to continue. To date most such mergers are among small and medium-size firms, but the combination in 2016 of the prestigious Arnold & Porter law firm, based in Washington, with the New York firm Kaye Scholer brought the prospect of consolidations more firmly into view.