During a breakfast discussion this morning, the managing partners of some of Washington’s top law firms said that they believe the Big Law business model has fundamentally changed and that the industry is just now starting to figure out what the new environment is going to look like.
The discussion, which was hosted by The National Law Journal, brought together T. Mark Flanagan Jr., managing partner of McKenna Long & Aldridge; Karl Racine, managing partner of Venable; and Roger Warin, chairman of Steptoe & Johnson LLP—all of whom spoke about what their respective firms were doing and about what the future might hold for some of the District’s largest law firms.
Overall, the consensus was that 2009 was an unprecedentedly bad year, both in terms of drops in revenue and in the reduced headcounts many firms saw as a result of layoffs and associate deferrals. While there were some slight improvements in 2010, this year failed to mark a return to the boom-time days in the years leading up to the recession.
Warin said Steptoe was able to avoid layoffs in 2009 by freezing associate salaries and deferring first-years, actions that saved the firm “tens of millions of dollars from the expense budget.” This year, he said, the firm has unfrozen associate salaries and was going to be offering bonuses to associates. But he said the signs of life at the firm came with a caveat.
“We are seeing an increase in the number of billable hours per lawyer. But that’s because we have a smaller workforce,” Warin said. Steptoe has become much more strategic in how it approaches laterals and hasn’t replaced lawyers who have left the firm as quickly as it might have in the past, Warin said.
Flanagan noted that a year ago, many industry watchers predicted that there would be an increase in demand in 2010, even if it was only 1% or 2%. “That just hasn’t happened,” Flanagan said. He said that with only the occasional exception, demand has been down for most Am Law 200 firms, forcing many firms to become more creative in how they approach the idea of providing “value” to clients.
Among the things McKenna has done, Flanagan said, has been to increase its reliance on alternative billing arrangements, primarily because more clients are requesting them. “Last week, I received 10 letters from clients who were asking about pricing. We’re trying to address their concerns while also staying competitive,” Flanagan said.
Warin said that Steptoe has been seeing an uptick in the number of requests for proposals (RFPs) from clients. The challenge, he said, is to determine which of those RFPs are “real” and which are simply sent out by clients as part of negotiations with another firm. “We compete in some RFPs, but only on those we see as real requests,” he said.
Racine said that part of the reason demand in Washington has not rebounded as quickly in as some other markets, including New York and Los Angeles, is because there was a lag in regulatory practice work. Racine’s point has been supported by several surveys released recently by market watchers, including the NLJ and Wells Fargo.
“Two years ago, after the election, everyone expected to see a major increase in regulatory enforcement. But Congress and the Obama administration were slow to start on that. That slow start hurt,” Racine said, pointing to areas such as energy and environmental regulations, which have gained little traction, and financial regulatory reform, which is just now going into effect. “And as is usually the case in Washington, the regulations we have seen have not tended to be broad but have been specific and reactive.”
That said, there has been regulatory activity in areas that weren’t thought of as “hot spots,” Racine said. “Who could have predicted the oil spill? There has been a lot of activity on that. Food safety? It was a surprise to see action there,” he said.
On the lateral front, the three managing partners agreed that hiring is increasingly being done on a more practice-specific basis. As Flanagan put it, “We take a look at opportunities and decide whether they fit with our overall goals.”
None of the firm leaders said they were considering making a move toward a mega-merger, as was the case with Hogan Lovells and SNR Denton this year. But Warin left the question a little open-ended. He said, “We haven’t set ourselves to go out and find a marriage proposal. We might consider dating someone, but we aren’t seeing anyone at the moment.”
Racine said there are also opportunities outside of Am Law 200 firms, including some boutiques. “We’ve gone further [than the Am Law 200] and looked at some boutiques,” he said.
Toward the end of the discussion, David Brown, the NLJ’s editor-in-chief who served as moderator, asked whether the changes being made by law firms today were temporary or marked a permanent shift in the profession. Flanagan said that he sees them as fundamental shifts that are here to stay, particularly in regard to alternative billing arrangements.
“For an alternative fee arrangement to work, firms have to deliver for their clients. That takes discipline and efficiency. That’s not going to change any time soon,” he said.