Bad news for lawyers

The news that mega law firm Weil, Gotshal & Manges is laying off many of its associates and cutting pay rocked the corporate world Monday.

While layoffs aren’t atypical stories for the business press, as the New York Times points out, they’re rarer in corporate law:

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.

Sixty junior lawyers, known at firms as associates, lost their jobs. That amounts to roughly 7 percent of Weil’s associates. Annual compensation will be reduced for roughly 30 of the firm’s 300 partners, in many cases by hundreds of thousands of dollars. And 110 non-lawyers — roughly half of them secretaries — were let go.

The leadership of Weil, 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.

The lead quote in the Wall Street Journal was shocking for its honest assessment from a senior partner at the firm. Weil also paved the way for another firm to make a similar announcement:

“We all expected [work] would pick up meaningfully this year, but it clearly hasn’t,” executive partner Barry M. Wolf said in an interview. “I think we’ve come around to the view that this is the ‘new normal.’ “

Legal industry experts said Weil’s retrenchment could be the first of many in the industry and shows that even the top ranks of the legal profession aren’t immune to the financial pressures unleashed by the recession.

In an email to employees Monday, Mr. Wolf said there would be “meaningful compensation adjustments for certain partners.” In some instances, pay would be cut by hundreds of thousands of dollars a year, the firm said. Such hefty pay cuts often serve as a not-so-subtle invitation for lawyers to leave a firm. Phone calls to several Weil partners weren’t returned on Monday.

Mr. Wolf said in his email that the firm had been able to delay the staff cuts until now, partly thanks to big-ticket business in recent years, such as its roles advising GM on its 2009 Chapter 11 filing and collapsed brokerage Lehman Brothers Holdings Inc.

Hours after Weil’s announcement, Washington lobbying stalwart Patton Boggs LLP confirmed that 17 partners were leaving the firm. Earlier this year, the firm laid off 65 lawyers and other employees following a decline in profits. “Although we regret partner departures, we, too, need to change to remain competitive,” said a Patton Boggs spokesman. Patton Boggs now has about 500 lawyers.

The Bloomberg story offered this context about Weil’s practice and the amount of money they’ve been pulling in recently:

The firm was ranked the 13th in gross revenue last year by the American Lawyer, a trade magazine, at $1.23 billion. The firm’s profit per partner was $2.23 million, the magazine said.

Wolf said in the memo that the bankruptcy and litigation practices, notably on behalf of Lehman Brothers Holdings Inc., has enabled the firm to not make reductions as a result of the fall off in legal services after the 2008 financial crisis.

Lehman, which is still liquidating after exiting court protection last year, paid Weil, its lead bankruptcy law firm, $454 million through the end of last year. It filed the largest bankruptcy in U.S. history, measured by debt.

Weil has been the No. 1 bankruptcy firm for decades representing almost every historic restructuring from Enron Corp. to WorldCom Inc.

Big public company bankruptcies peaked at 91 in 2009, falling to 35 in 2010 and just 24 last year, according to a database maintained by Lynn LoPucki, a professor at the University of California, Los Angeles, who tracks annual filings.

Lehman became the most expensive bankruptcy in U.S. history in April 2010, when it topped the record $757 million tab for energy trader Enron Corp.’s three-year liquidation, according to Lopucki. Lehman fees surpassed $2 billion by December 2012.

While it might seem a bit inside baseball, law firms laying off workers, especially two of the most well-known names in the business is big news. It points to a slowdown in two large industries – banking and politics.

Both of these sectors help fuel the economy and two of the biggest service providers cutting back signals that the recent downturn for these industries isn’t temporary. According to one expert in the Times story, there is 10 percent excess capacity in the ranks.

Among the main factors hurting law firm profitability is that corporate clients have become stingy. Until recently, pricing pressure barely 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 pressures of their own, have clamped down on legal expenses. They have beefed up their in-house legal staffs and perform much of the work themselves. They are demanding that for routine assignments like document discovery, work be sent to outsourcing firms and contract lawyers rather than given to expensive associates. And they ask for discounts or capped fees at places like Weil, which charge more than $1,000 an hour for some partners’ work.

It looks like cost cutting is going to win again. But there are only so many ways to reduce expenses before growth begins to suffer. It’s another tip of the hat that business reporters should pay attention to when thinking about stories.