The Slaughter of Innocence - the stark choices facing crisis-hit law firms

Law firms around the world are being forced to contemplate something a good many have never had to face before, even during the 2008/09 financial crisis – letting partners and staff go at scale.

Fat profit margins and a paternalistic partnership ethos have traditionally insulated law firms from concerns that are relatively commonplace for their clients. Managing partners often recoil at such barbarous conduct. Yet the global coronavirus crisis is rapidly shredding that rulebook.

No business can be contemplating the future right now without seriously considering headcount. And law firms are no exception. Once partner drawings are cut, staff furloughed, salaries slashed and credit lines increased, options to preserve liquidity are subject to the laws of diminishing returns. Scrapping fresh flowers in the reception area doesn’t get you very far in the struggle to survive, let alone restore partner profits. When furloughs and sabbaticals end, the clock still ticks inexorably towards the next salary payment day, whether revenue is reviving or not.

Even if the firm is still relatively unscathed, any business leader worth their salt has to be thinking about how to ensure the business is match-fit for the economic restart. What people will the business need? What skills will be in demand? Where is there surplus capacity? Are we in shape to compete in a world where profitable work may be scarce for some time to come?

For law firms, where almost the entire cost base is driven by the number of fee earners, it would be a dereliction of duty for leaders not to be considering how the business needs to be configured for an uncertain future. In plain words, do we have too many lawyers?

This is the moment when deflection psychology usually kicks in. Partners point the finger away from themselves and their associates towards the staff who are not fee-earning lawyers but play vital roles in HR, marketing, IT, finance etc. Why not slim their ranks first? Superficially attractive to some partners – especially those who barely acknowledge the existence of such people at the best of times – this approach is usually a mistake. Quite apart from crucial considerations of fairness and equality of treatment, just do the math. With the exception of a few senior people, you would normally have to fire three support staff to save the average cost of one lawyer. Focusing on support staff doesn’t fix the problem.

The reality is most law firms tend to build up surplus lawyer capacity over time. This often manifests in bulging ranks of senior lawyers, just below partner level. These are good lawyers who have been loyal to the firm. They can work largely unsupervised and be billed at high rates. They keep clients happy and help make partners’ lives easy. Why would partners want to let them go? They don’t. Powerful partners typically fight to keep their own people while urging leaders to slim down others’ teams. Advocacy is skillfully deployed: about the personal impact on those asked to leave, damage to the culture and reputation of the firm and impact on future recruitment.

Serious and pertinent though these concerns are, the key question for leaders remains: what is in the best long-term interests of the firm and the majority of people who will be part of its future? At base level, no-one thanks a leader who shied away from reducing headcount and led the firm into insolvency as a result. And the reality is every business has to stay in shape.

Unproductive lawyers stunt the competitiveness of the firm. What’s the benchmark? As a rough rule of thumb, firms normally expect a more senior lawyer to generate fees 3x his or her salary costs. Consistent underperformance against that benchmark will normally be raising questions.

Of course, when times are hard, work gravitates upwards, masking the issue. Feeling insecure, more expensive partners and senior associates hoard work normally done by more junior lawyers to keep themselves busy. Junior lawyer hours drop, and their experience suffers. Bills get larger and harder to justify. Profitability falls.

Worse, the best lawyers – those who attract work and are always busy – start to resent across-the-board cuts to their profit shares and salaries when they see too great a disparity in work rate or financial contribution from colleagues. When things pick up, they will be the first to get offers from more profitable, leaner and more-efficiently run firms. Lose those people at your peril. And this is not just about associates. Do we have too many partners? That is a question any law firm leader will also be asking themselves right now.

So faced with such pressures, how should law firm leaders react? In the end, experience suggests no favours are done to the firm or individual lawyers by keeping people in roles for too long where they cannot earn their keep or perform to the standard required. It’s tough love. Nobody should underestimate the emotional and financial hit to those who lose their jobs. But these are highly qualified people. The vast majority will find other jobs and may even be happier in a different environment. Maybe not as well paid or prestigious. But ultimately good pay and prestige are not an entitlement, they have to be earned.

No-one is advocating hire & fire, knee-jerk reactions, arbitrary process or anything but the generous and empathetic treatment of affected individuals. This crisis is not their fault and that would be an absurd and self-defeating way to run a law firm. Neither is this a manifesto for stealth lay-offs under the guise of ‘underperformance’. But no firm can afford to carry under-productive lawyers indefinitely, especially when faced with an existential threat. The nettle has to be grasped.

Set a date to reach a conclusion on whether to lay off people or not. If so, decide the scope of the programme. Agree on a plan. Cut too little and you risk destroying morale as those who remain fear they will be next. Cut too much and you risk cutting into the muscle of the firm and its ability to compete as the crisis abates. Construct generous packages. Test the plan for fairness, consistency and unwitting discrimination. Communicate personally, transparently and with clarity. What is your message, not just to the people affected but those who remain? What does the future hold for them?

And finally, pay attention to your best lawyers – the ones you will need to power out of the downturn. Paradoxically, you will be fighting to retain your best lawyers while you struggle with the anguish of trimming overall numbers. Every firm will want rainmakers and key specialists. Don’t forget to engage them.

Few will have taken their current leadership role with any of this in mind. It’s natural to wish it wasn’t you having to take such painful steps. But there’s no-one else. That is a leader’s burden. Deal with it with decisiveness, openness and fairness in equal measures.

For more from David Morley on the current crisis, see ‘Covid crystal ball – A&O’s former chief sets out the post-lockdown dynamic awaiting the legal elite’