Firm Leaders Survey: Slow Growth on Tap for 2014
Amid a languid recovery and threats to their business model, firm leaders now measure progress in small steps.
That said, several firm leaders we spoke with reported that they anticipated some improvement in the corporate climate in 2014. "We're hoping for a bit more momentum on the corporate front," says Barnes & Thornburg managing partner Alan Levin. "The trend lines are moving in a way that I think there should be some growth in 2014."
As the business climate improves, more partners may be open to lateral moves, which could also bring more business to firms. "I think some good people have been hesitant to move because of uncertainty over their business base," says Jim Maiwurm, chairman of Squire Sanders. "As they get more comfortable with their business flow, you could see more lateral movement."
Asked to identify the practice areas that they think will be most financially challenged in 2014, 38 percent of respondents selected bankruptcy, followed by corporate. That result and the numbers for overall business bankruptcies in the United States confirm that the flow of restructuring work following the crisis has largely tailed off. According to the Administrative Office of the U.S. Courts, there were 34,892 bankruptcy filings in the 12 months ending Sept. 30, down from 42,008 in the 12 months ending Sept. 30, 2013, and far down from a postcrisis high of 58,721 in the 12 months ending Sept. 30, 2009.
Just as firms moved attorneys into burgeoning bankruptcy practices in 2009, they have now redeployed lawyers into corporate and finance work. "You need to be nimble and opportunistic in today's environment," says Brad Karp, chairman of Paul, Weiss, Rifkind, Wharton & Garrison.
Still, one feature of the post-Lehman landscape has remained constant: the increased importance of Washington, D.C., as a legal center. The U.S. capital was picked by 69 percent of respondents as the place where they expect to add laterals next year, closely followed by New York at 67 percent. The changing regulatory landscape, exemplified by the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in banking, is leading firms to step up their efforts to expand their D.C. outposts.
In September, for instance, Palo Alto–based Cooley added 54 lawyers to its Washington, D.C., outpost when it merged with Dow Lohnes, a Washington-based firm with particular strength in advising the telecommunications sector. "It reflects the evolution of our model and our client base," Cooley's Conroy says of the deal. "There are certain regulated practices that are becoming key differentiators for firms like ours that have a large technology client base, and as those clients mature, they have more inside-the-Beltway needs."
Other firms have seen a similar uptick in activity in Washington, D.C. "Our D.C. office has been our firm's busiest over the last two or three years, reflecting extremely high litigation demand and the reality that the regulatory environment has become increasingly active and punishing," says Karp, whose firm has represented JP Morgan Chase & Co., Citigroup Inc. and Deutsche Bank AG on crisis-related work.
While the fallout from the economic crisis has increased the importance of Washington, D.C., and fueled activity in litigation and regulatory practices, it has not had the profound impact on how firms bill their clients that some expected. On average, respondents said that just 18 percent of their firm's matters include an alternate fee arrangement. "A substantial amount of our work is still based on hours," says Barnes & Thornburg's Levin. "Buyers of legal services grew up with that system and understand it." Adds Cooley's Conroy: "There's been a significant market correction in the bargaining power of big firms, and clients have become more vocal about getting more value-driven billing arrangements. There's been more talk than results, but what has happened is pervasive discounting, which is not an alternative billing arrangement."
Squire Sanders' Maiwurm, however, expresses surprise at our survey findings on the billing questions and says that he sees more interest in alternative arrangements. "There's no question that some clients are not comfortable with a billing approach based on hours," he says. But alternative fee arrangements, he says, "will become more widespread. They won't become the majority, but they'll definitely increase."
The bottom line is that five years after the recession, the legal sector remains in flux, with no calming influence in sight. "The market rewards firms that are nimble and responsive to client demands, and are in the right commercial hubs," Maiwurm says. Much may have changed since Lehman's collapse, but that assessment remains as true now as it ever was.