Big Law Firm to Cut Lawyers and Some Partner Pay
BY PETER LATTMAN
Tina Fineberg for The New York TimesThe headquarters of Weil, Gotshal & Manges are in the in the General Motors building in New York.
One of the country’s most prestigious and profitable law firms is laying off a large number of lawyers and support staff, as well as reducing the pay of some of its partners, a surprising move that underscores the financial difficulties facing the legal profession.
The leadership of Weil, Gotshal & Manges, a New York-based firm of 1,200 lawyers that counts General Electric and Sanofi as marquee clients and handled the bankruptcy of Lehman Brothers, informed its employees Monday morning about the reductions.
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Sixty junior lawyers, known in law firms as associates, will lose their jobs. That amounts to roughly 7 percent of Weil’s associates. Roughly 30 of the firm’s 300 partners are having their annual compensation reduced, in many cases by hundreds of thousands of dollars. And 110 staff employees – roughly half of them legal secretaries – are being let go.
Although publicly traded companies, including Wall Street banks, often cull their ranks during fallow periods, it is rare for large law firms, especially elite ones like Weil, to fire employees en masse.
“While we have been able to avoid these actions in the past, and it is very painful from a human perspective, the management committee believes that these actions are essential now to enable our firm to continue to excel and retain its historic profitability in the new normal,” Barry M. Wolf, Weil’s executive chairman, wrote in an e-mail to its employees.
The “new normal,” in the view of Weil’s management and echoed by legal-industry experts, is that the market for high-end legal services continues to shrink. In the years leading up to the financial crisis, profitability exploded and the number of lawyers expanded at the country’s top firms as demand increased about 4 percent a year. But demand has been flat to down for the past five years, according to several industry reports, and shows little sign of picking up.
Dan DiPietro, chairman of the law firm group at Citi Private Bank, said that there were too many lawyers at the country’s largest firms, estimating the excess capacity at as much as 10 percent of the lawyer population. He believes that the profession could possibly experience a wave of job cuts.
“My guess is that a good number of firms have been thinking about right-sizing and waiting for someone to provide them cover and we’ll see more of these moves,” Mr. DiPietro said. “As difficult as layoffs are, it seems that they will be necessary for some firms to get in synch with the current market dynamics.”
The market dynamics at Weil, whose partners make, on average, about $2.2 million a year, are rather unique. During the depths of the financial crisis, the firm avoided the layoffs that some other firms were forced to make. That was largely because of its pre-eminent bankruptcy practice, which advised both General Motors and Lehman Brothers on their Chapter 11 filings. Those assignments, particularly Lehman, generated hundreds of millions of dollars in fees, not only in bankruptcy work, but also from the ream of litigation that flowed from them.
In an interview last week, Weil’s chairman, Mr. Wolf, said that the firm thought that as the crisis-related work wound down and the economy recovered, it would see a pickup in its “transactional business,” the lucrative practice of advising corporations and private equity firms on acquisitions, as well as performing legal work for stock and bond offerings. But transactional activity at Weil remains soft and has not returned to anywhere near pre-2008 levels.
Nevertheless, the firm has performed well relative to its peers, according to data compiled by Bloomberg and Thomson Reuters. In 2012, Weil was ranked No. 1 in private equity representations globally, advising on more than $67 billion worth of transactions. And it ranked No. 2 in domestic mergers and acquisitions, with more than $165 billion in total deals; this year, it has maintained that position, advising on deals like American Airlines‘ $11 billion merger with US Airways and Kinder Morgan’s $5 billion acquisition of Copano Energy. Still, Mr. Wolf said, there is not enough work to keep Weil’s army of lawyers sufficiently busy.
“Our market share has been improving, but the market has been shrinking,” Mr. Wolf said.
Mr. Wolf, a corporate lawyer who joined Weil in 1984 straight out of law school, said that while the decision to cut associates and staff was personally distressing for him and the management committee, there was little debate that it was the right one.
“We believe that this not just a cycle but that the supply-demand balance is out of whack across the industry,” he said. “If we thought this was a cycle and our business was going to pick up meaningfully next year, we would not be doing this.”
Monday is expected to be a grim day at Weil, with partners informing associates of their dismissals in one-on-one meetings. Each will get six months of severance. The firm’s leadership has already informed partners of their pay reductions. (There are no partner cuts because under the firm’s partnership agreement, partners can only be fired for cause.)
The mass layoffs are the first in the 82-year history of Weil, which has 21 offices across the globe and headquarters high above Fifth Avenue in the General Motors building, one of New York’s most coveted business addresses. Last year, the firm posted revenue of about $1.2 billion, and its profits per partner ranked 13th of all firms nationwide.
In the e-mail sent Monday morning, Weil said that it was taking this action “from a position of strength.” It said that it had zero debt and a fully financed pension plan with more than $500 million in assets. It also noted that its partners do not have any long-term compensation guarantees.
By listing those attributes, Weil appeared to be pre-emptively addressing comparisons to Dewey & LeBoeuf, a law firm of a similar size that dissolved last year. Dewey collapsed after disappointing profits and a heavy debt load forced it to slash partners’ salaries. Many Dewey partners had multiyear, multimillion-dollar contracts, and when they did not get paid their guarantee, they fled, crippling the firm.
A year after Dewey’s demise, most industry specialists say that it was an outlier, a victim of gross financial mismanagement. Still, some of Dewey’s problems were the result of trends facing successful firms like Weil.
Among the main factors hurting law firm profitability is that corporate clients have become stingy. Until recently, pricing pressure hardly existed for premium legal services. Decades ago, clients would receive a bill with only a lump sum and the statement “for professional services rendered.”
But today, big corporations, facing business pressures of their own, have clamped down on legal expenses. They have beefed up their own in-house legal staffs and perform a lot of the work themselves. They are demanding that for routine assignments like document discovery, firms use outsourcing firms and contract lawyers rather than more expensive associates. And they routinely ask for discounts or capped fees at places like Weil, which charge more than $1,000 an hour for some partners’ work.
Steven J. Harper, a retired partner at the law firm Kirkland & Ellis and author of “The Lawyer Bubble: A Profession in Crisis” (Basic Books, 2013), said that Weil’s move highlighted the inexorable long-term industry trend: big law firm partnerships were now nothing more than bottom-line, profit-maximizing businesses.
Profits per partner – a statistic highlighted annually in the closely watched American Lawyer magazine rankings – have become an unhealthy obsession, Mr. Harper said. Driving this fixation is the frenzied lateral hiring market, in which firms are poaching lawyers with large, established books of business from their rivals. Firms fear that if their profitability wanes, they will lose their stars.
“The culture at most of these large law firms is that you must maintain astronomical levels of partner earnings in order to keep your top talent,” Mr. Harper said. “Cutting staff is one way is one way to do that.”
Mr. Wolf, the executive chairman of Weil, said that while the layoffs would help the firm’s profits, the move was not about reducing expenses to pad partners’ bank accounts.
“This is not about cost-cutting but about the future of the firm and strategically positioning us for the next five years,” Mr. Wolf said.
Several industry experts informed of Weil’s decision applauded the move. Peter Zeughauser, a law firm consultant, said that many firms were in denial about the continued slack demand for their services, and Weil’s cutbacks could pressure them into getting leaner.
“We have been telling our clients about these economic realities for some time now,” Mr. Zeughauser said. “Weil is a bellwether firm, and this will be a real wake-up call.”
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