Just over one month into the twin crises of Covid-19 and Low Oil Prices, Alberta companies are scrambling to control costs. Most are doing so to buy enough time and space to identify new, adaptive business models to emerge from the wreckage sustainably stronger. So, what are law firms doing in this downturn to cut their costs and adapt to what could be a 'new normal'?
I do not know what all of them are doing, but I do know how many Big Law firms have responded. They have fired a large number of talented young associates. At first glance, this might appear to be sensible – lowest on the totem pole, less experience, higher overhead, lower billable rate, etc. On a closer examination though, mass associate layoffs are bad idea for five reasons:
- Tone Deaf: Deep associate cuts are a tone-deaf message from Big Law to its own clients; in particular a message about their clients' own cost-cutting efforts. By firing associates, Big Law signals that top heavy (senior lawyer, counsel and partner) rates will be the only rates. To put it another way, Big Law has tightened its typical rate spread (e.g., $250-1000/ hr) and has effectively made its services more expensive for its clients ($500-1000/hr). Cost conscious in-house lawyers are always wondering how to reduce external legal costs, and in these uncertain times they are even more focused on managing legal spend. The tone-deaf message comes at the exact moment that in-house lawyers are under huge pressure to do just that.
- Inefficient: Smart in-house lawyers use mid-level Big Law associates with experience beyond their years to get more work done for less. Mass associate layoffs remove that option for clients, while slyly assuming that Big Law partners will just do the work instead (naturally, at a higher rate). However, there are many times when supervising or lead partners do not know the nuances of their clients' day-to-day operations, or even the company staff working those matters. And not every in-house lawyer will necessarily want a senior partner trying to fill that role – irrespective of cost.
- Competition: This one should be obvious. If Big Law cuts a client-loved associate under the assumption that a Big Law partner will do the work instead, is there not a risk that the client will just hire that associate? If the client does hire that lawyer on staff, is there any need to send any of that work to Big Law? Is Big Law simply populating the ranks of its competition with lawyers who are cheaper AND who know their clients' businesses?
- Bad Blood: Big Law is typically not great at relationship management. This is especially true with associates, who are often looked down upon, if not as purely expendable. A client-loved associate laid off by Big Law is likely to be irked. If that associate then takes a job with Big Law's client, how much incentive does that associate have to refer matters back to their old shop? In fact, that lawyer might go out of his or her way to ensure that nothing is referred back to their old Big Law firm.
- Poor Business Judgement / Reputational Hazard: As a catch all, what opinion might clients develop of a Big Law firm that makes the above mistakes– let alone the serial repetition of those mistakes? At some point, those mistakes can point to the quality of leadership and operational management at a Big Law shop. In the midst of managing the twin crises, it is critical that service providers (including law firms) protect their reputational goodwill with clients; making deep cuts within the associate ranks to protect the partnership does not convey a positive PR message that Big Law is sensitized to the difficult issues at hand.
If simply cutting associate ranks is a bad idea, then why has Big Law reached for it as a ready solution to Covid-19 and Low Oil Prices? In our first post, we reviewed how the financial model of Big Law is principally driven by the profit-per-equity-partner metric. Almost all Big Law firms take this a step further by compensating partners on their own billable hours first, followed by originated work (e.g., work done by associates) second. In short, this drives a "me first" and "me now" mentality. I believe these two drivers are obstacles to good business leadership and long-term strategy.
As the entrepreneurs behind Big Law, what if partners actually acted like entrepreneurs?
What if they kept their associates in exchange for a brokered cost-sharing agreement with their associates and clients during the crisis? If a large firm did so, it would not risk the negative outcomes described above. This could also buy enough time and space to identify new, adaptive business models to sustainably emerge from Covid-19 and Low Oil Prices – the exact strategy their own clients are investigating and deploying now.
But Big Law partners would need to get out of their own way first to make this happen - by putting the business of providing a service before themselves. Unfortunately, I think this is an unlikely outcome at this point in the crisis. But it does give New Law a unique and unprecedented opportunity to do so in its place.
As a client of mine says, "Do Nine Favours Before You Ask for One" - a solid mantra to remember when considering the best way to competitively manage your professional talent, your reputation and your clients' expectations.
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