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BigLaw: How Will a Double-Dip Recession Impact Large Law Firms?

By Liz Kurtz | Thursday, December 15, 2011

Originally published on September 6, 2011 in our free BigLaw newsletter. Instead of reading BigLaw here after the fact, sign up now to receive future issues in realtime.

I recently received an assignment from BigLaw editor Neil Squillante: "The recent volatility of the stock market may prove a harbinger of another recession. In fact, some pundits think a recession has already begun. How will large law firms handle a double dip?"

Have large law firms learned from Great Bloodletting of 2009-2010? Are they better equipped to handle another downturn? Or will they again resort to the scorched-earth layoff strategy that resulted in 10,000 or so top-of-class law school graduates becoming a lost generation?

Well, who better to pose these questions to than Bruce MacEwen, a master of law firm economics and the erudite thinker behind Adam Smith, Esq. and JDMatch? Like a Federal Reserve chairman, MacEwen takes a measured view of the situation.

We Do Not Control Our Destiny

"The kind of volatility we're seeing in the stock market is, I believe, perfectly rational" (he says professorially), given that "we're being buffeted by good news and bad news of great magnitude on what seems like an accelerating time-frame." That said, he adds, "I would not take whatever the stock market does any given week or any given month as meaning it has any unusual forecasting prowess. There doesn't seem to be a solid trend established and until that comes I think it's predicting nothing but uncertainty, which we're acutely aware of already."

As to whether disaster lurks around the bend, MacEwen delivers an informed maybe. "Six months ago I would have said a double-dip recession was extremely unlikely," he notes. "Now I think it's a 50/50 bet." Why? Well, among other things, lots of Americans are still underwater on their home mortgages, and unemployment is not only historically high, but appears poised to remain that way. We face perhaps a decade of 'supra-normal' unemployment," MacEwen says. "Many lost jobs are simply not ever going to come back."

What does this mean for law firms? According to MacEwen, "the most important thing to remember about our industry is that we do not control our destiny." Thus, "when consumers stop buying and businesses stop investing in growth and hiring, our clients are hurt," both by the decline in top-line revenues, and the simple reality of decreased workloads, which result in a decreased demand for legal services. And, of course, that also means that, if they go into a second recession, "we will inevitably go with them."

What About Large Firms Jobs?

Even if growth declines, we probably won't see "stealth layoffs," or the kind of bloodletting we saw a few years ago, right? Wrong according to MacEwen.

If a second recession comes our way, MacEwen believes, more layoffs are bound to follow. "Large firms are certainly better equipped to weather a recession now than in 2007," he opines, "but they have also learned the virtue of quickly paring capacity to match demand, and that's a lesson no one has forgotten." The pressure to maintain profits per partner is on, he points out, and law firms will do what they must to keep numbers up.

But doesn't that mean law firms are leaner, meaner, and better at staffing nowadays?

"Firms are as lean as I've ever seen them," MacEwen says. "Partly this was because the recession forced them to address deadwood which they had the luxury of letting accumulate in richer times. They won't be that undisciplined again, I predict." In addition, he notes, firms are configuring themselves to be more responsive to economic flux by exploring "all kinds of different career models" — beyond just outsourcing and the use of temporary attorneys.

MacEwen lists non-partner track associates, flex-time, and "onshoring" (the use of lawyers in inexpensive cities like Dayton, Fargo, and Wheeling) as staffing alternatives that many previously bloated firms now use to stay lean and nimble.

At the end of the day, however, MacEwen reminds us of the bleak truth. "Nothing will prevent layoffs on whatever scale it takes to get capacity in line with demand," he says. "We have lost our virginity on that score."

A Postscript Arrives at the Same Conclusion by Another Means

Apparently, my questions touched a nerve in MacEwen. After my interview and upon further reflection, he published an article — A Double Dip Recession? — in which he changed his analysis though not his conclusion. MacEwen now believes that although the last recession officially ended according to the National Bureau of Economic Research, other metrics suggest we're still in a recession. Thus, a double dip recession won't have any impact among large firms. In other words, welcome to the new normal — don't expect large firms to allow capacity to exceed demand even if that means layoffs, stealth or otherwise.

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