2023 headwinds and your practice

2022 was another banner year for Big Law. Most AM 400 law firms exceeded budget and those at the top of the pyramid did spectacularly well. 2021 numbers put 14 firms with an astounding public-private partnerships (PPP) of $5M+. 2022 was even better. Wachtel, Cravath, Kirkland & Ellis, Simpson Thacher, Latham & Watkins, Quinn Emanuel and others in this select group have been hitting the ball out of the park. Another 30+ law firms saw PPP $3M to $4M+. Even a host of well-managed mid-sized firms and boutiques had their best year ever last year. Partner compensation has trended upward the last several years across the board. Most adapted very well to the Covid environment and working remote. Yet, cracks in the dam have started to appear.

The post-Covid sugar high has spiked, corporate profits will take a hit and the mass layoffs impacting Big Tech/media companies will spread beyond Meta, Google, Amazon, Microsoft, Disney, Tesla Salesforce and Peloton. Financial service companies such as Goldman Sachs will take a hit. This may be just the beginning. While many law firm leaders are "cautiously optimistic" about 2023, there are headwinds - especially law firms over-weighted in the corporate sector.

Goodwin Procter and Cooley are two major firms that had "mass layoffs" of associates and staff. Other law firms will follow, although it remains to be seen how many will cut that deeply. Stealth layoffs may impact income partners. As general counsel (GCs) and other legal services providers face challenges, they will put more dollars in litigation, intellectual property, bankruptcy and restructuring, employment and regulatory matters. Redundancies will be shaved, and the bean-counter mentality will exert more influence on spending, cash-flow considerations and elimination of "redundancies."

With rising interest rates, higher cost structures, excess office space and a possible recession, law firm leaders will navigate terrain almost as rocky as House Speaker Kevin McCarthy's landmines in the House. Law firm leaders, even those that forecast modest 2023 growth, will give multi-tasking new meaning. Challenges will include balancing bottom-line cost cutting while increasing revenue and maximizing profits, recruiting outstanding lateral partners while holding onto top revenue producers without screwing up the culture.

Most firms will increase billable hour requirements, be less tolerant of write-offs and scrutinize partners 'realizations and increase billing rates. Many partners with rate-sensitive practices will surely feel pain. Some firms may become overly "eat-what-you-kill," as they increase billing rates and billable hours and emphasize client matters with greater leverage. Other managers may cut money from important areas - support, business development and recruitment. How many firms I wonder will take chips from the income partner pile and plop them into the equity partner pool?

The equity bar continues to rise, and the emphasis on collections and profitability. Some partners will be de-equitized, while others will be gently nudged out. We are already seeing an increase in "stealth layoffs." Some practice areas deemed not sufficiently profitable may be on the chopping block. Firms with mandatory retirement strategies may be less hospitable to older partners - even those who maintain a strong practice and work ethic. (Many of our clients love this demographic).

This all being said, many firms are not taking their foot off the pedal in lateral partner recruitment. However, most are more strategic and less opportunistic. The vetting process of laterals will intensify. Our search portfolio for transactional partners (corporate, health care, finance, intellectual property, R.E. etc.), which we thought would diminish remains strong. Litigation partners in many practice areas are highly sought after, especially in cyber-security, complex business litigation, toxic torts, financial services and health care. Books of business requirements are increasing and the equity bar at top firms is trending north of $5M. On the other hand, mid-rate, mid-market firms have significantly more flexibility, and one of our growth areas.

The 19 Practice Checklist

With three or more checks, it may be time to evaluate career options

1. It is uncertain how firm-wide changes, leadership transition or cultural issues will play out.

2. Mandatory retirement could impact key partners.

3. The new compensation structure, point allocation etc. may not be in your best interests.

4. Billing rate increases could negatively impact your practice - especially with key clients.

5. Firm-wide client conflicts have increased.

6. New lateral partners have negatively impacted the culture, certain practice groups or legacy clients.

7. While you love the firm and have done well, you are re-evaluating your family priorities, law-firm demands vs. balance of life issues and priorities.

8. Personality conflicts with a key partner (s).

9. An overly "eat-what-you-kill," sharp-elbowed mindset is taking hold. Some changes may be counterproductive.

10. Recent lateral partners have over-promised and under-performed, yet structured greater compensation than those with stronger collections and sweat equity.

11. Higher than normal talent turnover (partners and/or associates) may portend other issues (financial, lack of support, reputational), etc.

12. Your practice has outgrown the firm, or you may simply need a stronger brand, greater depth, breath or geographic reach.

13. Your practice has stagnated, and it may be time to evaluate a new environment.

14. You or those in your group have become "siloed," with little institutional synergies.

15. You refer business to others in the firm, but it has become a one-way street with little reciprocity.

16. Much of the decisions impacting the local office (e.g., local billing rates) are micro-managed afar from those in distant offices.

17. Changes in income/equity partner status could have unintended consequences - not all good.

18. A "blood in the water" dynamic has taken over and legal recruiters are calling ad nauseam.

19. The "sweat-equity" accomplishments of many partners seem to have been replaced by "what have you done for us lately?"