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December 12, 2007

2008 Legal
Industry Outlook

Sponsor Update:  Recent deals by CBRE’s law firm group:  Mayer Brown’s 15-year lease for 243k SF at 1999 K St., a Vornado building designed by Helmut Jahn set to deliver in ’09; and Kaye Scholer’s 15-year deal for 55k SF at 901 15th St., an ING Clarion property.  Congrats to all!

What do the experts foresee for the legal industry in 2008, shaping up as a time of exceptional uncertainty?  Time to check in with Altman Weil's Ward Bower and Hildebrandt’s Lisa Smith, noted management consultants for law firms.

Based in Philly, Bower specializes in law firm organization, strategic and partnership planning, and compensation issues.  A lawyer himself, he graduated from the Dickinson College of Law.

  • Within the legal industry, a possible recession in '08 will hit the highest value legal business the hardest.  This includes M&A, IPO, and corporate financial work.  Demand will hold up for the very top tier firms but others will be scrambling.

  • Employment law, environmental law, and other commoditized practice areas will hold up but continue to experience price pressure.

  • DC firms, which tend to focus on litigation, regulation, and government affairs, will hold up much better than those in NYC and other parts of the country.  But since the last recession, DC firms have diversified more in terms of practice and geography, and that may make them more exposed this time around.  

  • The ‘00-‘01 recession lasted 18-24 months for law firms and many were forced to make painful cuts.  The great challenge for firms is how to continue to hire and build their talent pipelines while trying to maintain profitability levels through a downturn.

  • Though firms talked about diversifying practices after the last downturn, most had short memories and failed to do that. 

  • Consolidation will continue as it has proved to be a successful strategy in most cases. Analysis of mergers involving AmLaw 200 firms reveals that 77% of the 117 mergers from ’00-‘05 produced an increase in profits-per-partner after one year.

Based in DC, Smith specializes in strategic planning, mergers, and operational issues for global law firms.  Smith’s background is in management consulting; she was with Price Waterhouse before joining Hildebrandt.  She has an MBA from Dartmouth’s Tuck School. Her comments:

  • 2007 looks like a very solid year for most firms but managing partners are nervous as they budget for 2008.  But to some extent, that is true in most years as there is always uncertainty about where business will come from.

  • Though an economic slowdown looks likely, law firms are more resilient than ever.  They are better managed than they were 20 years ago, and consolidation has allowed them to diversify geographically and by practice.  So while certain practices will take a hit in the coming year, for global firms business is booming in places like London and the Middle East and in a number of practice areas.

  • Certain practices will feel pain, however, and firms are already shedding jobs in areas like securitization.  Cycles have shortened, and things slow down and pick back up very quickly.

  • One positive of a potential slowdown is that the rate of increase in associate compensation will slow or stop for a period, which is good for firms and their clients.  Lateral moves will also slow as lawyers’ market values flatten.

  • Standard billing rates will likely continue to increase in ’08 but look for more discounting so the effective rates will grow more slowly.

  • Firms should continue to hire at the same levels as in the past so they don’t experience a shortage when the economy inevitably rebounds.  Look for firms to focus more on performance management, though, and be quicker to cut underperformers.
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