Adam Smith, Esq. isn’t in the business of covering—or typically even commenting on—late-breaking news, but there’s news and then there’s news.
To the affected associates and staff: Nothing comforting or reassuring can be said—this is dreadful, awful, horrible, bad bad news for you—but if you can gain perspective after awhile, remember that in America it’s no sin to be knocked down; the sin is not getting right back up.
At this point in the story sportscasters would say “let’s go to the videotape,” but here we say, “let’s go to the numbers.” (And shall we note for the hygiene of the record that these were the antithesis of stealth layoffs—small kudos, at least, are in order for that.)
- 110 staff, about half secretaries, were let go, on a total staff headcount base that wasn’t disclosed, but this probably is on the order of mid single digits in percentage terms;
- 60 associates will be gone as well, out of just under 900, so call it 7%;
- and “Annual compensation will be reduced for roughly 30 of the firm’s 300 partners, in many cases by hundreds of thousands of dollars.”
According to the 2013 AmLaw 100 (the most recent available), Weil as of late last year had 195 equity and 112 non-equity partners, so the cuts to partner compensation are hitting a slightly higher percentage of partners (call it 10%).
Somewhat buried in the fully disclosed firm-wide memo announcing the decisions—at least I haven’t seen any other publication covering it expressly—was this line, pregnant with implications: “there will have to be meaningful compensation adjustments for certain partners in light of the economic realities of the new normal. It may well be that some of these partners will decide to pursue other opportunities (emphasis mine).” In plain English, the firm isn’t bluffing. The American Lawyer‘s online report underscored this expectation:
Some of [the partners] affected can expect their pay to be reduced by two or three of the firm’s 15 compensation “bands,” according to Wolf. One former litigation partner, speaking on the condition of anonymity, said such a reduction could cost an individual partner between $200,000 and $500,000 a year.
Another former Weil partner suggested that the move could lead to a thinning of the partnership ranks. “Those are probably partners they would not mind leaving the firm,” this former partner said.
We can all hasten to add that taking a cut in presumably very generous compensation beats being unemployed with a stick, but it’s still news in Law Land, as Peter Lattman gently educated his readers in the lead paragraph of his coverage:
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.
The news on Monday that Weil, Gotshal & Manges, among the nation’s most prestigious and profitable law firms, was laying off a large number of lawyers and support staff while also reducing the pay of some of its partners, sent shock waves through the industry and underscored the financial difficulties facing the legal profession.
What else do we know?
- The layoffs were targeted at the “complex commercial litigation” groups in Boston and Houston. Presumably the partner compensation cuts were targeted as well, in some plausibly rational fashion. These are always judgment calls, and time may show them to be folly or prudence incarnate, but the takeaway is they were targeted. They were not XX% across the board meat cleaver reflexes.
- Most importantly of all, the the Executive Partner Barry Wolf volubly discussed in his announcement that the decisions came in reaction to secular, not cyclical, developments in the market for high-end legal services. Mr. Wolf’s key observations:
- “As we have discussed during various town hall meetings over the last few years, the market for premium legal services has entered into a “new normal” after the 2008 financial crisis.”
- “We are taking these actions from a position of strength” and, in particular, “we have zero debt outstanding. This has been the case throughout our history — and we have no plans to change that. Further, our partner pension plan remains fully funded with over $500 million of assets in it, and we do not have any compensation guarantees with partners other than for the first year a lateral partner joins the Firm.” (Sure, there are drop-dead obvious anti-matter parallels here with everything Dewey did so very wrong, but any managing partner who didn’t enumerate these simple facts for the record, in this environment, would merit psychiatric, not just PR, counseling. )
- Now we get to the critical points (all quotes from Mr. Wolf, emphasis mine):
- “It appears that the market for premium legal services is continuing to shrink.”
- “Actions to enhance revenue alone will not be sufficient to position the Firm as necessary for these new market conditions.”
- “We don’t see a dramatic shift back to the way things were.”
- “We believe that this not just a cycle but that the supply-demand balance is out of whack across the industry. If we thought this was a cycle and our business was going to pick up meaningfully next year, we would not be doing this.”
Mr. Wolf calls it “the new normal” and I call it “growth is dead,” but the fundamental point is inarguable.
We, as an industry, have on the order of 10% excess capacity—bluntly meaning “too many lawyers”—given the market’s new level of demand for what we do.
Now, the question I’ve been asked multiple times in the past 24 hours? “Is Weil the last?”
Not a chance.
Other firms fall into three rough categories:
- They could use some trimming but there’s been no sense of true urgency;
- They really need to do something like this but have been paralyzed by indecision and existential worries over what it would mean for their “culture;”
- They need someone to toss them a permissive lifeline and Mr. Wolf has just done them the favor.
Call it “cover,” call firms lemmings or sheep—I merely call it the answer to the lawyer’s favorite question in cases like this—but we will see a fair number more of these announcements. The only question is whether, as a wise managing partner I know well remarked yesterday, “whether it’s in the headlines or below the fold.”
For those of you left wondering, my nominee for the lawyer’s favorite question is, “Who else is doing it?” This is of course such a preposterously irrelevant and errant distraction on its face that it would leave Fortune 500 CEOs slack-jawed and questioning the fundamental common sense of the person propounding it. But we ask it, and think the answer actually means something.
To recap: Weil’s action was profoundly justified by economic reality; it not only comes from a position of strength but it strengthens the firm even more so. It was surely a lonely decision, but comfort will be found soon enough in ample and worthy company. Welcome to the new normal. Welcome to Growth Is Dead.
You knew there was a but coming.
Prominent commentators are arguing (Big Law’s Troubling Trajectory) that “big-firm practice has become just another business [and] most readers might react to Weil’s staggering partner incomes by asking why $2 million plus a year — or even half that — isn’t enough. It’s a fair question.”
First of all, who among you, dear readers, doubts that law firms are businesses and have been since before the days when Abe Lincoln hung out a shingle? As I recall my Dickens, the outrage of Jarndyce v Jarndyce was less the titanic length of the imbroglio than the endless gravy train of revenue it brought to the lawyers. This is not news.
But to the “$2 million plus a year” issue: First of all, who really cares—other than, with some justification, spouses—what Weil partners make?
Step back from Law Land: Say you’re debating between an Audi and a BMW. Does it enter your calculus how much the CEOs, or the SVP’s, of those car companies make? And if it did, what would deliver a stronger message about the quality of the firm? Higher pay or lower pay?
Stipulate that we agree on little, but I imagine my friend and I would warmly endorse the conviction that the prominence of The American Lawyer‘ annual PPP scorecard has become wildly unjustified.
That’s not the question. The question is whether if your firm lives and breathes on that landscape, you think you’re exempt from the market’s rules? In other words, what market-free zone does our commentator imagine the Weil Gotshal’s of the world live in?
There was a drumbeat theme to Mr. Wolf’s remarks (which is why I quoted him so extensively) and it was simply this: The market has changed and we must change with it.
Others who are no longer in the fray may sniff, but if I were a partner or associate in today’s market—recognizing with steely eyes and a gimlet heart what that market’s all about—my money would be on Darwinian realists like Mr. Wolf.