An industry that has suffered globally, but especially in North America, during this crisis is the legal industry. The setbacks are shocking, and news of layoffs in some of the largest law firms have led to widespread industry panic. Blanket lawyer and staff cuts, rescinding of all incoming offers, and entire law firms dissolving make the industry extremely fragile, with future prospects of improvement questionable at best.
In many ways, this is intuitive: the legal industry is dependant on the rest of the economy, and when the economy is booming, acquisitions, mergers, investments, and overall transactional activity serves as the lifeblood of the industry. Therefore, when the economy is in recession mode, most corporate activity reduces, and the focus then shifts to insolvency/bankruptcy law, and increased litigation. The problem in most ?Global Law Firms? is that they are extremely dependant on billing, and their overheads are enormous. They are also for the most part behemoths employing over two thousand lawyers globally. Corporate law firms are also extremely visible, and invest in extremely expensive real estate and infrastructure in most large cities.
An entry level associate in a reputable corporate law firm on Wall Street, Washington, Chicago, San Francisco or Boston for that matter, will earn anywhere from USD $150,000-$200,000 per year, and bill anywhere from $250-$350 per hour. Factoring in benefits, incoming Associates cost their firms roughly $300,000-$400,000 per year. If they don?t bill at least 2000 hours a year that are recovered by law firms as legal fees from their clients, the law firms are no longer viable. In addition, it?s very hard to transfer attorneys with a specialization in one particular area, to a highly specialized area such as insolvency, IPR, or even anti-trust, merely because market conditions and demand and supply considerations demand it. In January and February alone, more than 3,500 lawyers and staff lost their jobs. The domino effect has reached England as well, where Allen and Overy announced 450 layoffs, blanket pay freeze, and spinning off some of its businesses. It?s not just the quantum of work that has declined, the ability of clients to pay the lawyers on time for services rendered has also been severely curtailed, and the inability to recover legal fees is a significant reason why there is a cash crunch in many large firms. The simple fact is that law firms have extremely high variable costs, their size makes them unwieldy, and they are much too dependant on large clients in the finance industry who are tottering. Where the famous economics euphemism ?More is better? was the mantra, significant scaling down will be required to enable the viability of many firms.
Things in India, however, are not so gloomy. For once, protectionism will help the Indian legal industry. The Indian firms are small, robust, specialized, and for the most part have a reasonably solid client base. The associates in all Indian law firms make a fraction of what associates in any advanced legal industry make, and also don?t receive additional statutory benefits to the extent their European and American counterparts do. The twenty-partner rule that Indian law firms are subject to also keep the firms at a manageable size, and even the largest firms have a few hundred lawyers at the most. Indian law firms are typically conservative, and don?t tend to overreach, hence remaining reasonably well-capitalised during this economic downturn. In addition the nascent nature of numerous areas of law in India allows attorneys to develop expertise in niche areas of the law, and cross over to those divisions where the demand for legal services is the highest, thus allowing them to remain gainfully occupied.
The unwieldy size and economy-sensitive revenue models that the large global law firms possess makes them a risky proposition at least for the next few years, until the economic situation improves, and liquidity increases. On the other hand, the Indian law firms should be able to hold their own and weather the storm by staying compact, developing new areas of law practice, and curbing recruitment, at least for the near future.
The author is a sports and corporate attorney
