Keeping up appearances

Sonnenschein and Cadwalader got plaudits for being open about their redundancies. Others were more coy. Which is best: transparency or stealth?


Keeping up appearancesThe beauty of law firms has traditionally been their counter-cyclical nature.

The presence of a hefty litigation or arbitration group has provided a natural hedge against a market crash in any particular transactional business line. Suffered a drop-off in work in one area of your business? No matter, another will take up the strain.

Despite this theory, the US legal market has already seen redundancies. The largest number of announced layoffs so far came in late May, when Chicago-based Sonnenschein Nath & Rosenthal revealed it was making 124 lawyers and staff redundant (TheLawyer.com, 28 May). That figure, which included 27 associates and four counsel, also included six partners, five of whom were income (or salaried) along with one who was full equity. The high aggregate total turned Sonnenschein overnight into the poster child for the downturn. So why did Sonnenschein do it?

Transparency versus stealth

Sonnenschein’s refreshingly candid managing partner Elliott Portnoy confirms the prevailing mood of uncertainty about the nature of this downturn and the failure of disputes to take up the strain. He labels the current sentiment “anxious”.

The natural inclination of lawyers, argues Portnoy, is to liken the current downturn to earlier ones and by doing so hope to discover clear markers as to when and how it will end.

“But this downturn is very unlike others,” he maintains. “Others have been by sector, such as technology. When that happened, at least other sectors in the economy were doing okay. This is across nearly every sector.

“Plus, this downturn has not so far been accompanied by a corresponding uptick in litigation or bankruptcy. We’d all say these teams are busier, though not as much as expected, which in itself carries additional anxiety. As a sector, we can’t yet depend on the counter-cyclical aspects. We can’t quite get our heads around which downturn this resembles.”

Brad Hildebrandt, chairman of consultancy Hildebrandt International, agrees. Litigation in the US remains “somewhat soft”, he says, compounding the pain felt by firms most sharply focused on the areas that have been particularly hard hit over the past few months, such as real estate finance and capital markets.

Arguably, the most striking aspect of the Sonnenschein layoffs, other than the numbers, was the fact that the firm decided to go public and deal with the negative PR head-on.

Portnoy says the chief reason he and his partners opted for this approach was that to have acted differently would have made it even harder for the individuals affected to find other opportunities.

“Plus, it’s entirely consistent with how we prefer to relate to our people and clients,” he adds. “To do it in the dead of night, under the radar, incrementally or, worse, to pass it off as performance-related? To do that would not help give our people a viable shot at finding other employment quickly because of the spectre of underperformance that would have been hanging over their heads.”

It is, however, a certainty that under-the-radar cuts are happening. As Paul Tvetenstrand, the equally open managing partner of Thacher Proffitt & Wood, puts it: “Frankly, there’s no way on God’s green earth that firms haven’t had to do something. You can plan for a slowdown, but you can’t plan for everyone slamming on the brakes.”

Unlooked-for benefits

The transparency versus stealth argument is likely to rumble on for months. But whatever the true position of the number of economic layoffs, what is certain is that the top US firms are already doing what they tend to do best in turbulent market conditions – adapt.

“What do the layoffs mean?” asks Alisa Levin of recruitment consultancy Greene-Levin-Snyder. “They mean that law firms are now being run like businesses. You might stop production of the SUVs because they’re no longer popular, but you continue to build the green cars.”

Like the US automobile industry, times may be tough but no one is lying down and dying just yet. If there’s one thing the top US law firms have in spades, it’s commercial nous. The next few months should put that adaptability to the test like never before.

The signs are that some firms are already ahead of the game. Cadwalader Wickersham & Taft, which was one of the first major firms to publicly reduce its workforce this year, making 35 layoffs in its structured finance and capital markets practices in January, has since beefed up considerably in IP. The team that featured fewer than five lawyers a year ago now has more than 30.

In addition, in January the firm launched a private equity team with the hire of Ron Hopkinson from Latham & Watkins. Subsequently, in April, Cadwalader hired private equity partners Stewart Kagan and Geoffrey Levin from Akin Gump and Kirkland & Ellis respectively, while this month healthcare and telecoms specialist Greg Patti was recruited from O’Melveny & Myers.

Cadwalader garnered plaudits in certain circles for its decision to go public with its January layoffs. But six months on, rumours refuse to die away that the firm, where the structured finance group (which was folded into the corporate group earlier this year) is thought to have generated around 40 per cent of revenue last year, will be forced to make more.

In January, Cadwalader partner Greg Markel ruled out any further redundancies this year – a line he maintained when interviewed by The Lawyer for this article.

Bizarrely, the significant hiring in the less affected parts of some firms’ businesses has arguably had an unlooked-for benefit for several. In recent weeks an unofficial strategy, partly aimed at fielding awkward questions about layoffs from nosy journalists, appears to have developed.

A number of firms have begun pointing to the increase in their total number of associates as evidence that they have so far avoided having to make any layoffs relating to the economy.

Paul Hastings, for example, which maintains that the 22 associates it is thought to have cut earlier this year were the result of annual performance reviews, pointed to the total growth in the number of its associates as evidence of the firm’s health.

Between May 2007 and May 2008, the number of US associates at Paul Hastings grew from 513 to 548, while globally the increase was from 658 to 691. A spokeswoman for Paul Hastings adds that first-quarter revenue at the firm was more than 10 per cent up on the first quarter of 2007, while attrition rates had remained static over the past three years.

“If we had made economic cuts, you’d expect our attrition rates to increase,” she argues.

There is, of course, no reason why a firm could not cut lawyers from one group where work has dried up and hire others for groups that are busy – the result being a net increase in lawyers. The real problem appears to be that the firms willing to admit publicly to a dearth of work in certain business areas remain few and far between.

Alongside the firms that are arguably obfuscating when it comes to numbers are those that are seeking to distance themselves from the high-profile credit crunch casualties, such as Thacher Proffitt and McKee Nelson. (Somewhat hilariously, a spokesman for the latter claimed the firm had not made any layoffs as the associate exits had all been voluntary.)

Clifford Chance is one such firm. The UK-headquartered giant takes the line that it cut only a handful of contract lawyers late last year who were hired to do a specific job. With that cut made, the firm sees no need for any more.

“We believe the action we took last November is very different from what’s taking place at other firms today,” John Christian, personnel committee chair for Clifford Chance in the Americas, tells The Lawyer. “We had hired six lateral associates to do a specific kind of work [reviewing transaction documents] for a specific client [Standard & Poor’s]. They all understood they were not part of the general pool of associates. When the work disappeared, we had no other options available for these highly specialised people.”

Adding to the wreaths of smoke making the true position in the US legal market difficult to distinguish is the fact that firms such as Sonnenschein are also using the current turbulence as an opportunity to boost lawyer numbers.

“We made 42 lateral partner and counsel hires in 2007 and we’re on course for a record number of hires this year,” says Portnoy. “We also opened three new offices in 2007, in Silicon Valley, Dallas and Charlotte. It is our belief that in this economic environment we need to be aggressively looking for talent.”

Clearly, with turbulence comes opportunity, but nobody here is truthfully kidding themselves that the worst is over. Leave it to Thacher Proffitt’s Tvetenstrand to sum up the current mood in New York. “The things this [structured finance] market was doing were fundamentally beneficial,” he says. “Structured finance isn’t a bad thing. It’s a profitable and beneficial method of finance. I hope the worst is over, but if somebody has some magic dust to sprinkle on this problem and make it go away, then I’d like some.”

Brave faces

There is a bunker mentality building among law firms in the US at the moment. To be more accurate, it’s not only among the firms.

“Associates are very gun-shy about moving,” according to David Bargman of recruitment consultants Baum Stevens. “They’re hunkering down. Most aren’t even considering a move right now.”

Bargman’s comment is likely to touch a nerve in several US law firms. The ugly picture of layoffs, whether announced or under the radar, hits one of the issues at the heart of any firm – namely, recruitment and retention. With the downturn now getting on for a year old, several of the firms that have made layoffs this year are hunkering down just like their junior lawyers. A handful appear to have decided that engaging with the legal media to shed light on their future plans is an unnecessary irritation.

Firms such as Jenner & Block (which cut around 10 partners from its equity in March) and Thelen Reid Brown Raysman & Steiner (26 associates and 85 staff, also in March) refused to comment on how they were dealing with the continuing downturn when they were contacted for this article. As far as they are concerned, it seems, the issue is history. Now it’s time to move on.

Well, maybe it’s not that surprising. According to statistics released earlier this month by the US Department of Labor, the legal market here lost 1,100 jobs in May alone. It was the third consecutive monthly drop in US legal market circles and contributed significantly to the seasonally adjusted total of 9,700 legal services sector jobs lost in the past year. The consensus from recruitment consultants, and those lawyers who will engage with the subject, is that worse is to come.

According to one recruiter, law firms’ attempts to put a brave face on things have been less than convincing. “The truth is, we’ve seen the numbers from maybe 30 firms for the first quarter of 2008,” he says. “Overall, the market is down around 10 per cent. My guess is you’ll see more layoffs.”

As another recruitment consultant, Larry Mulman of Major Lindsey & Africa, puts it: “To an extent, the downturn in structured finance has provided an excuse for firms to look at other practice areas and to cut dead wood. Within the boundaries of good taste, firms are going to try to get as lean as they can. We’re going to see more.”

The shutters are coming down, but there’s no panic – yet.