Top law firms are beginning to show signs of austerity following the frenzied lateral hiring market in corporate practices in 2021. Multiple firms in the Am Law 50 have reportedly begun to take measures aimed at managing their attorney ranks.
Cooley has implemented a freeze on hiring associates, sources close to the firm have told The American Lawyer. Leaders at Cooley declined to comment for this story, but a spokesperson denied the existence of an “official hiring freeze” at the firm.
While the firm on Wednesday announced the hire of a partner who had left her last role in June, the firm has otherwise not unveiled any new hires since early July, following a busy first half of 2022.
Meanwhile, sources close to Reed Smith said the global law firm is dealing with profitability gaps between its London office and lower-performing locations, including its oldest office in Pittsburgh, leading the firm to let go of more senior lawyers without significant books.
To be sure, law firms for years have trimmed partnership ranks to cut unproductive partners. But a consultant said one factor behind Reed Smith’s moves is the firm’s use of pandemic-era rate discounts for clients alongside rising compensation costs for associates.
In a statement, a Reed Smith spokesperson pointed out that the global firm, which reported a head count of 1,572 lawyers globally in its 2021 survey response to The American Lawyer, is within 1% of the size it was at this time last year.
The spokesperson also noted that the firm added 137 lawyers in 2022 “in key markets and practices consistent with our strategy.”
“We continually evaluate all aspects of our business in order to best support our clients and ensure the continued strength of the firm. In the normal course of our business, we routinely make personnel decisions,” said the spokesperson.
“These decisions are consistent with personnel actions we have taken in the past as we prudently manage our business,” continued the spokesperson. “Reed Smith’s performance in 2022 is strong, and we remain focused on growing the firm in our core areas of strength to continue to provide top quality services to our clients around the world.”
Alexander “Sandy” Thomas, Reed Smith’s global managing partner, declined to be interviewed for this article.
A Dimming Outlook
These measures and others—including law firms allowing head count attrition and adhering closely to performance review standards—come as many of the world’s most profitable and competitive law firms face headwinds from inflated associate compensation, pressures to keep rates low for clients and a lull in demand for legal services, according to industry observers interviewed in recent weeks.
Legal recruiters say that firms that bulked up on corporate hires in 2021 could find themselves with too many associates and not enough work to give them in today’s comparatively lackluster transactional environment.
“Firms that aggressively doubled down on corporate these past 18 months are pulling back the throttle, some much more than others,” said Dan Binstock, a partner at Washington, D.C., search firm Garrison & Sisson.
Expense moderation in the second half of 2022 has been anticipated by leading legal industry observers in light of the 14.7% increase in expenses across the legal industry in the first six months of 2022, as reported by Citi Private Bank’s Law Firm Group in August. Cost increases have significantly outpaced the 5% average revenue increase reported by firms for the same time period, creating margin pressure in the second half of the year.
Cost increases have been driven largely by attorney compensation, the Citi survey suggests. Compensation expense growth of 17.5% was driven by the growth in salaried lawyers, who are now being paid higher salaries than in the same period of 2021.
After a 30% decline in lateral hiring in 2020, when hiring pauses took hold of law firms during the early months of the COVID-19 pandemic, lateral hiring rebounded at an unprecedented rate in 2021, according to data released in April by the National Association of Law Placement.
In fact, lateral hiring was up 111% in 2021 compared to 2020, which authors at the NALP said was the largest year-over-year increase in the 23 years in which the association has been tracking such data.
Hiring at the associate level was particularly busy last year, increasing 149%, figures shows.
Rises in compensation expenses during 2022′s first half include a full year’s worth of associate salary raises adopted in the middle of 2021, combined with a second round of associate salary increases adopted at the start of 2022, said Citi’s Gretta Rusanow in an August interview.
Meanwhile, average demand for legal services across all law firm sizes fell in the first six months of the year, the Citi survey found. Defined as the volume of billable hours logged, demand across the industry declined by 0.6%. Pulling this figure downward were responses by global firms, which saw the greatest demand fall (-2.1%) of any law firm size category.
And with a drop in demand during this first half of the year, productivity declined 5.1% across the industry. For many law firms, Rusanow said this drop marked a return to pre-pandemic levels of productivity from the “unsustainable” heights of 2021.
To address the overfill of corporate associates, some firms are attempting to repurpose them for use in busier areas, hoping natural attrition will right-size the remaining excess, said Owen Burman, segment manager for the Wells Fargo Private Bank Legal Specialty Group, in an August interview.
“At some point, these things will have to be addressed,” Burman said.
Will attrition be enough to stave off more austerity measures? Burman said in August that it’s hard to tell.
“At some point, if demand doesn’t rebound and we’re seeing aggressive associate costs as well, something has to give,” he said. “As firms start to budget in the fall and see how the demand picture looks, we could see some action on that front.”