To cope with slack demand outside the litigation and IP spheres, respondents plan to use an array of staffing measures to maximize profitability. Sixty-seven percent of respondents said they had utilized contract attorneys in 2012, and secondments were even more popular, with 77 percent of respondents saying they'd used them in the past year. But firms show little inclination to increase their ranks of full-time associates. Sixty-eight percent of respondents described the size of their first-year class as the same as last year, an increase from 58 percent who gave that answer a year ago. The percentage of respondents who described this year's first-year class as larger than last year's declined 8 percentage points, to 21 percent.
Associates have come under increased scrutiny too: Fifty-three percent of respondents said that their firm had implemented a competency model for these lawyers, a 10 percent increase over a year ago. Says Shook Hardy's Murphy: "We're having smaller associate classes, and we're quite comfortable with the quality of candidates we get for contract attorney and staff attorney positions."
Equity partner rosters are also being constrained. Forty-five percent of respondents said they deequitized partners in 2012 (a 6 percent increase from a year ago), and 46 percent said they plan to do so in 2013 (an 8 percent increase from a year ago). The percentage of managing partners who indicated that they would ask between one and five partners to leave in the coming year remained steady at 55 percent, but there was movement among the smaller number of respondents who said that they would ask between 11 and 20 partners to leaveit rose to 5 percent from 1.2 percent a year ago. "There is less tolerance in the system to carry partners for longer periods of time after their performance has tailed off," says one firm leader, who asked not to be identified.
For partners who remain, capital calls are part of the new reality. Twenty percent of respondents indicated that their firms made a capital call this year, and 23 percent indicated that their firms would likely make one in 2013. (This was the first year we asked about capital calls, so year-previous comparisons are not available.) One managing partner at a firm that is likely to make a capital call next year says that despite the global economic uncertainty, his firm remains committed to growth through lateral partner additions, and a capital call is the most prudent way to pay for it. This managing partner was no outlier: Despite the uncertainty about demand and growing leeriness about increasing the number of partnership-track associates, 80 percent of respondents predicted that their firm's total head count would grow in 2013, with 60 percent of respondents forecasting growth of 15 percent. (This figure is down from the 2011 survey, in which 89 percent of respondents expected their firm to grow in the upcoming year.)
A majority of respondents (58 percent) said that their firms carry bank debt and other third-party debt, but generally their use of it was conservative. Sixty-six percent of respondents whose firms carried third-party debt said that it totaled $10 million or less, and 78 percent indicated that the debt represented no more than 5 percent of total assets. Thirty-six percent of respondents whose firms carried debt said that they borrowed less in 2012 than in 2011.
Generally, firms appeared to be prudent about their debt. Only three respondents put their firm's debt at more than 15 percent of total assets. "Even though interest rates are low, there is a general uneasiness in having a significant debt load," says Bruce McLean, chair of Akin Gump Strauss Hauer & Feld. Several managing partners said that as a result of Dewey & LeBoeuf's collapse, their partnerships and, especially, potential laterals began to attach greater importance to healthy balance sheets.
But despite the challenges, most respondents said they expect their firms to post increases to their bottom line in 2013. Nearly 32 percent expect partner profits to grow at their firm by more than 5 percent, up from 26 percent who said growth would top 5 percent a year ago. Forty-five percent expect profits to increase by 5 percent or less in 2013. "There's reason to be cautious, but we are growing," says Proskauer's Leccese. "We have some really busy practices, and we expect to be profitable."
This article originally appeared in The American Lawyer under the headline “Vote of Confidence.”