Earlier this week, Weil, Gotshal & Manges (“among the nation’s most prestigious and profitable law firms”) made a round of layoffs and related personnel moves. Executive Partner Barry Wolf’s firmwide email on the cuts mentions the “new normal” four times. Understandably, a number of commentators have suggested that this is the ultimate confirmation of the “new normal” theory of the legal market. Above the Law’s Anonymous Partner writes, for example:
this is a big win for the new normal advocates in terms of validation of their arguments. To have their terminology adopted by an elite NYC-firm reporting profits per partner of over $2 million sends a strong message to the industry. Whoever was on the fence about whether this “new normal” business was for real should be looking for a ladder.
If one of the most successful firms in the country is feeling the pain of a changed market, pretty much every firm must.
News outlets have jumped on the “transformation of the legal market” angle to this story. Bloomberg, for example, quotes legal consultant Peter Zeughauser:
“It’s not just that less is coming in,” Zeughauser said, “It’s a sign of the rising role of LPO’s and contract attorneys that are filling a need that clients have been long demanding, which is they don’t want to pay these kind of prices for first to third year associates.”
We believe much junior lawyer work can be done better than it now is, and that it increasingly will be. We have spent the last several years building software to help junior corporate lawyers review contracts faster and more accurately for due diligence and contract management purposes. We have found many large firm clients who care about this change, and we are convinced that deep change in law practice is coming. But is this the type of change that has come to Weil? More broadly, what “new normal” is in play here?
What is the “New Normal”?
While there may be consensus that things have changed in the legal market, it is less clear what that change is. Here are three possibilities:
More Efficient Law Practice
According to Paul Lippe (one half of the writing team of the ABA Journal’s excellent “The New Normal” series):
Based on what we’re seeing with sophisticated legal departments, the four horsemen of the New Normal will be:
• Legal process outsourcing.
• Substitution of technology for people in repetitive work.
• Treating legal work as teamwork rather than individual work.
• The emergence of one or several standards for measuring quality (perhaps value) in legal services.
The New Normal doesn’t claim that 100 percent of today’s legal work gets disrupted in this way, but 30 to 40 percent will—with significant impact.
What would efficiency-type new normal layoffs look like? While we think technology may actually increase junior lawyer employment (and definitely will increase their job quality), presumably layoffs caused by this type of new normal would systematically hit lawyers whose work was replaced by outsourced workers and technology. An increasing share of junior associate litigation discovery work, for example, is now done by technology and outsourced workers. And much junior corporate lawyer work is ripe for automation. So, presumably, efficiency-type new normal layoffs would be concentrated among junior associates. And a firm that saw this type of new normal might also cut its class of incoming associates.
Law Firms Run as Businesses
Coud the “new normal” instead mean running the firm like a business, regularly culling underperforming groups and people? Peter Lattman writes in The New York Times Dealbook piece that broke the Weil story:
Layoffs are a brutal reality of corporate America. During fallow periods, publicly traded companies, including the big banks, routinely cull their ranks. The country’s largest law firms, by contrast, have historically taken a kinder, gentler approach, rarely firing employees en masse.
Former Kirkland & Ellis partner Steven Harper writes in a Times op-ed:
Cutting costs through layoffs and getting more billable hours out of the survivors has become a typical, businesslike response.
If the new normal is that law firms are being run as businesses with regard to culling, we would expect to see regular cuts of underperforming people and groups. The cuts should be relatively balanced across seniority levels, with perhaps more expensive or limited-revenue-generating individuals disproportionately impacted.
Demand for High End Legal Services is Shrinking
Or is the “new normal” that demand for high-end legal services has flattened and that firms can best thrive through expanding market share and cutting costs? Weil’s Wolf writes:
the overall market for transaction activity remains at the lower levels which we believe is the new normal … from a revenue perspective we will continue to take significant steps to further increase our market share. However, it appears that the market for premium legal services is continuing to shrink. Therefore, actions to enhance revenue alone will not be sufficient to position the Firm as necessary for these new market conditions.
In a related vein, perhaps the “new normal” is that clients are increasingly focussed on getting greater value from their outside counsel. The Times’ Lattman writes:
Among the main factors hurting law firm profitability is that corporate clients have become stingy. Until recently, pricing pressure barely existed for premium legal services. Decades ago, clients would receive a bill with only a lump sum and the statement “for professional services rendered.”
But today, big corporations, facing pressures of their own, have clamped down on legal expenses. They have beefed up their in-house legal staffs and perform much of the work themselves. They are demanding that for routine assignments like document discovery, work be sent to outsourcing firms and contract lawyers rather than given to expensive associates. And they ask for discounts or capped fees at places like Weil, which charge more than $1,000 an hour for some partners’ work.
Other recent pieces have covered the trend of clients demanding more efficient work.
There are different possibilities for who gets cut under this version of the new normal. If the market for high end legal services has shrunk overall, we should see cuts in practice groups most affected by these changes. These cuts should be balanced across seniority levels. If the new normal is that clients will not pay for junior lawyers, then we should see less junior lawyers. Alternatively, instead of cutting, firms could seek to increase the value of their junior lawyers by (i) lowering their rates, (ii) increasing their training or (iii) increasing their efficiency. We think increasing junior lawyer efficiency is the best alternative here.
The Definition Matters
These three concepts of “new normal” are related but not identical. The differences between them matter for how firms structure themselves in an environment that most agree has changed.
Disclosure: I spent a number of good years working at Weil and continue to have a number of relationships with the firm and its lawyers.