By V. Dion Haynes
Washington Post Staff Writer
Monday, March 9, 2009
Across the country, the recession is putting increasing pressure on law firms to slash spending and discount their services. Client demand for lower prices is prompting firms to outsource some of their document work to India, hire more temp or contract lawyers, shift from billable hours to fixed fees and eliminate staff.
Geoff Willard, a Northern Virginia lawyer who largely represents newly launched companies, illustrates how the Wal-Mart effect of discounting is playing out in the Washington region's legal community.
Willard left his job as partner at DLA Piper, a huge global blue-chip law firm, because, he said, he was fed up with the traditional business model that required it to annually increase rates and billable hours to finance ballooning profits and overhead.
Last fall, he joined a start-up "virtual" law firm that he said is much better suited to the current economic conditions: It does business mainly over the phone and Internet and through video conferencing. Because the firm lacks two of the biggest cost drivers -- a prestigious brick-and-mortar office and associates -- he said he is offering his clients substantial savings compared with what they paid before.
"Everyone realizes the big law firm model is broken," said Willard, a partner in Silicon Valley-based Virtual Law Partners, who works out of his office -- adjacent to his kitchen and family room -- at his Reston home.
Although thousands of lawyers and staff members across the country have been let go during the past six months, Willard and Virtual Law's founder say that since June they have been adding three partners per month. "When you tell people, 'I'm going to drop my rates 25 percent,' it's a pretty easy decision" for them to hire you, Willard said.
More than 60,000 people work in the legal profession in the Washington area, which, per capita, employs more in that sector than any other metropolitan region in the nation. Much of the work centers on the federal government, providing stability and steady work for many lawyers. But because so many global law firms have offices here, the local legal sector is subject to the same economic turmoil seen around much of the country. Experts say the changes across the country are unprecedented and are hitting the bigger firms in particular.
Unlike previous recessions, during which lawsuit filings increased, litigation this time is down sharply because the credit crunch is forcing corporations to curtail their legal spending, experts said. Partners are being de-equitized, associates fired, practice areas phased out, and some large firms are closing.
Last week, Latham & Watkins, which announced plans in late February to cut 440 lawyers and staff, said it was offering newly hired lawyers $75,000 -- nearly half of what would be their annual salaries -- to put off their start dates from October 2009 to October 2010.
"Right now as an industry, everyone is worried," said David Nersessian, executive director of the Harvard Law School Program on the Legal Profession. "No one knows what will happen next."
As the shedding of lawyers accelerates, business among outplacement services is booming. Marcia Pennington Shannon, principal of D.C.-based Shannon & Manch, said that since November her staff grew from 10 to 21 to meet the demand.
"The phone is ringing pretty constantly," said Shannon, whose company advises the unemployed lawyers on preparing résumés, interview techniques, negotiating and evaluating offers, and even finding alternative careers. "We're seeing people in their first year of practicing all the way up."
The uncertainty is fueling interest in coaches or image consultants who are advising lawyers not only on how they can restructure their practices, but themselves.
Deborah Katz Solomon, founder of Acuity Legal Consulting in the District, said more lawyers are seeking her advice on how to rebrand themselves, how to switch to a new specialty area to replace one that might be struggling and how to get more business out of existing clients. "Current work is not a sure thing," she said. Lawyers "need to be more proactive, entrepreneurial and more creative in thinking about where the business is going to come from in the future."
Legal services generate about $135 billion a year nationally, representing about 1 percent of the gross domestic product. From 2004 to 2007, the latest year for which government data are available, spending in the profession grew annually from 6.1 percent to 7.7 percent. In comparison, the GDP as a whole grew only by about 3 percent annually during that time.
Under the current model, large firms hire hundreds of associates out of school -- at salaries of around $150,000. Whether the associates earn bonuses and ultimately become partners is based on their ability to generate huge billable hours for a firm.
But corporate clients increasingly are balking at spending so much of their legal budgets on work performed by such high-priced, inexperienced lawyers.
Law firms spend as much as $40 billion a year on document review, experts said.
Over the past six months, the work more and more has been outsourced to lawyers in such faraway places as India. Since 2006, the number of lawyers working at offshore firms doubled to 2,000, said Ron Friedmann, senior vice president for marketing at Arlington-based outsourcing company Integreon.
Five years ago, the companies mainly digitized legal documents for law firms. Now corporate legal departments are hiring the companies to save on spending by their outside firms. And the companies' staff lawyers are being called upon to review the documents, work previously done by the firms' associates and paralegals.
"We have 300 people in India. We've added 50 people" in recent months, said Michael J. Dolan, chief executive of the Tusker Group in Austin. Dolan said his lawyers charge $25 an hour, compared with $150 to $300 an hour billed by paralegals and associates doing the same work at law firms. "We're in the process of adding another 30 people."
Experts say that small and medium-size boutique firms stand to gain the most from the discounting trend.
Officials at Virtual Law say the firm has grown from eight partners in June to 33. The firm said it expects to make a profit once it has 50 lawyers.
Besides saving money for clients, Willard said the firm is good for his home life, too. At his previous firm, he said, he worked 60 to 85 hours a week to keep up his billable time. Now he works 40 to 50 hours and has more time with his wife and two young daughters.
He said he has the ability under the new arrangement to work less and make more money. Because overhead is so low, he keeps 85 percent of what he generates, he said, instead of 30 percent.
"I can go to my daughters' piano lessons and tae kwon do practices," said Willard, who kept 90 percent of his clients from his previous firm. "I have clawed back a significant part of my life."