BY FRED POLLOCK
The technology boom that pushed first-year associate salaries to $125,000 is nothing but a faint memory. Forget about the halcyon days when loss-generating start-ups spent $2 million on Super Bowl ads featuring sock puppets and Harvard Law students juggled fifteen summer associate offers. Face the truth that law firms, especially the larger ones where most Harvard students begin their careers, may be strangely managed and at times resemble collegial professional associations, but they remain at their core profit-maximizing businesses. What does this mean for you? Summer classes will be bigger than last year.
First, witness a bit of recent history. Large firms were generally slow to react to the economic recession in 2001. Summer classes in 2001 were ridiculously large. For many firms, 2002 was even worse. Offers had been made in the fall of 2000 and 2001, when optimists continued to believe the economic doldrums would soon end. They didn’t and law students, seeing other traditional avenues such as investment banking and consulting blocked by a mass of their unemployed college mates, accepted those summer associate offers at record rates.
With too many associates and workloads falling faster than 401(k)s, the fall 2002 hiring season was bound to be tough. The poor situation was exacerbated when law firms made the conscious decision to avoid layoffs. Not every firm did and a few firms went under. A few accepted the public relations fallout and made rather public layoffs. A duplicitous few chose the more personally devastating tactic of enhanced performance reviews.
Most firms made the conscious decision to hire fewer lawyers in the future to bring staffing in line with the decreased workload. Some moved early to close the gates like Dewey Ballantine, shrinking the 2002 summer classes. Others waited too long and were forced to take draconian measures with the 2003 summer classes. The most extreme examples being Milbank, Tweed, Hadley & McCloy and Sullivan & Cromwell, which cut their 2003 summer classes by 55%. Milbank went from 71 in 2002 to 32 in 2003. S&C fell from 110 to 50.
On the bright side, this year the economy is no worse than last and the stock market is up. In the second quarter of this year, GDP grew by 3.1% compared to 1.3% in the same quarter last year or -1.6% during the recession-plagued quarter in 2001. The stock market is faring well. Don’t get too excited though because most of the incremental economic growth has been the result of increased defense spending. The stock market’s rise hasn’t significantly raised the number of initial or secondary public offerings, nor has it stimulated a rebound in the level of mergers and acquisitions activity. On the sadistically bright side, litigators and bankruptcy specialists remain busy sorting out the messes that were easily concealed during the boom era when stocks only went up and cautious behavior only cost investors money.
The good news is that large law firms have cut as deep as they can afford to go without creating a serious risk of being understaffed when the economy heats up again. Large firms learned this lesson after the recession of the early 1990s. It simply costs too much in terms of opportunity cost and out-of-pocket expense to build up a practice once the economy and workload are rapidly expanding. The bad news is that while most firms have adjusted to the slowed economic environment, the prolonged slowdown will expose the weakness of others.
Recruits will need to be more discerning than ever in assessing the financial condition and workloads of their target legal employers. A good place to start is the American Lawyer 100 and 200. The exact figures are disputable, but if the revenue per lawyer, the profit per partner, or the profitability index have decreased dramatically without a good explanation, such as the termination of a stream of contingency payments, then one should be weary. Another vital source of information is this year’s summer class. Don’t worry so much about the workloads of the summer associates, which is more a function of firm culture than anything else. Instead, inquire as to the workload of the younger associates. Be advised that during this recruiting season the spoils will go to those with the best information. Happy hunting.