Yet another psychological pressure is at work, entirely apart from whether firms are overly reliant on returning to the lateral market well. Very simply, it’s miserable to have to let people go, or even to reduce their compensation (if that’s even realistic).
Of course that hasn’t kept firms from thinning the ranks of associates and staff and cutting back, on the order of 50% industry-wide, on the size of summer associate classes and other traditional pipelines of talent supply, and some firms have also engaged in de-equitizations, but Weil may be to this day the only firm that has publicly announced it’s addressing overcapacity in its core partner ranks. You are welcome to hypothesize that other firms have been culling equity partners in stealth mode, but for me wherever possible I always prefer data to speculation, and that’s absolutely not what the data say.
Taking the AmLaw 100 numbers for “equity partners” this year and last year we have:
- 2012: 19,225 equity partners in AmLaw 100 firms
- 2013: 19,221
While we’re at it, I’ve saved you the trouble: This is a “difference,” if the gods of English will even permit us to employ that word (and they’re jealous gods), of 0.02%, or, as scientists might express it, 2 parts in 10,000.
Clarity: Let me elaborate for a moment on what I am and what I’m not saying, because we’re dealing with a number of variables here that interact.
The astute will have noticed that I did not criticize firms for raising rates in the face of stagnant to slipping demand. That was for two reasons. First, “rack rate” rises may largely be washed out by clients demanding discounts and/or driving firms’ realization levels even lower than they already were. So a rise in “MSRP” rates actually might have little economic impact.
There’s another reason rates might be rising that’s even more benign, if you will, than a price increase immediately offset by a discount. Rates could be rising because the composition of the BigLaw workforce (its demographic profile) is changing. I noted how firms took the scythe to associate ranks, but have done no such thing with equity partners, and very little cutting of non-equity partners. Firms that are relatively more top-heavy with senior people than they used to be will, changing nothing else, be charging higher rates.
Whether this aging demographic is a good thing or a bad thing or a “it just is” thing is a large topic for another day.
But we came into this by asking whether firms were cutting overcapacity by trimming equity partners and we have our answer: No, as an industry we have not even begun to deal with overcapacity in the equity partner ranks. We are, I can only conclude, not serious about this.
Where does this leave us?
- We’re being squeezed on the top line:
- by clients exercising pricing pressure and
- by the increasing visibility and acceptability of “substitutes” for at least some of what BigLaw has traditionally done.
- We have overcapacity, as an industry, on the order of 7% of our headcount:
- Citi Private Bank has estimated that if all of the 70,000+ lawyers in their sample of firms were working as many hours per year as they did five years ago, 5,000 of them would not be needed
- Yet we continue not only to prevent attrition from taking its natural course, but we are adding to headcount.
- Expense growth has again begun to outpace revenue growth
- Our #1 time-tested technique for increasing revenue is to raise rates; we can do that until the cows come home, but clients will take it right back in decreased realization—now at an all-time historic low for the industry
- Our #2 time-tested technique for increasing revenue is to load up on lateral partners; but in this environment they may be adding more to expense than to revenue
- We are completely unserious about taking the shortest route betwen two points in terms of attacking both overcapacity and expense growth in a single stroke: We have not even begun to address our equity partner headcount.
- Evidently we lack a sense of urgency
- The tepid, “no longer in free fall” economy has become the enabling economy, coyly inviting us to postpone for tomorrow what no longer seems a matter of great urgency today.
- We have, in short, committed the classic and so-oft-repeated sin of wasting a crisis.
Just a few days ago, Joe Nocera of The New York Times op-ed page wrote, How not to stay on top, which was ostensibly about Wang Laboratories and Research in Motion (now BlackBerry).
Wang went from an 80% market share in word-processing among the top 2,000 corporations to bankruptcy in about a decade, and BlackBerry of course went from inventing the cellphone and wireless email category, and utterly dominating it, to a a shadow of its former self today, with a “for sale” sign on outside corporate headquarters and a 2.7% global smartphone market share. What happened?