Latham & Watkins Layoffs Suggest A New Big Law World

For weeks we've been hearing news about layoffs at various large law firms.  They've been notable for both their breadth - they're happening in a lot of different shops - and their depth.  A lot of folks are being affected.  But today Latham & Watkins sent a memo around that makes me feel like something has changed materially in the large firm market.  The firm is laying off 12% of its associates - 190 lawyers.  The memo stated in part:

It is with deep regret that we are announcing and implementing today a layoff of associates, paralegals and staff, which will affect approximately 12% of our associates (190) and 10% of our paralegals and staff (250). Everyone who is directly impacted by this workforce
reduction will be notified personally today, and will be offered a comprehensive separation package, including payment of six months salary (up to total severance of $100,000) plus six months of continued medical coverage (through August 31, 2009), as well as other resources to support this transition.

Latham is a huge firm, so while the actual numbers are large, I'm sure other firms have fired a similar percentage of their lawyers.  So why is this one different?

A few reasons.  First, Latham is different.  It is a top shelf mega-firm.  I don't know of a comparable firm that has so publicly acknowledged siginificant economy-based layoffs. 

Second, a massive layoff like this breaks most of the remaining market stigma around Big Firm layoffs.  As I discussed previously, top tier firms have long been afraid of laying off associates for fear that rising 2L's from Harvard et al would not accept their offers.  In the downturn of 1991, when I began at Debevoise & Plimpton, I started with nearly 80 new associates.  The firm simply did not have work for all of us - but they bit the bullet.  Latham is so large and reputable, and these layoffs so public, that a good number of big, fancy firms will now find they have cover - that they won't suffer significant comparative reputatiton damage - if they lay off.  This doesn't mean that Cravath or Wilmer will lay off associates...but don't be stunned if a Paul, Weiss or Skadden, Arps does. There is a small upside to this layoff - the significant severance packages may set an industry standard.  But the flip side is that these layoffs may make other big firms feel that severance packages are the vitural equivalent of continued employment - that they take away most of the stigmatic sting of the act.  ("Like so many other leading firms, we are forced to contract right now.  Be assured, however, that our severance package is at the top of the industry.")

Third, the very method of describing the layoffs feels different - indeed, feels very Citibank or even GM.  The firm announced it is laying off 12% of its lawyers.  We know that big companies announce layoffs in this fashion, in part to reassure stockholders that they're taking costs seriously.  But representing layoffs in percentage terms necessarily feels particularly momentous because it is the same style used by public companies to convey seriousness. 

At first glance, the Latham layoffs are a big deal simply because of the raw numbers.  Dig deeper, however, and they may suggest that big firms have made the complete move from professional shops to corporations.  And that, in turn, suggests that new law grads - even those highly desirable Crimson and Maroons - really are just widgets.  We already knew that about car assemblers and even Wall Street analysts.  And now it's becoming tougher to deny the same about associates in large law firms.

There is no moral judgment here.  Law firms have been paying associates at levels typical of industries with far less employment instability.  In the past, associates at these uber firms have not faced much employment risk, even in downturns.  Now, unfortunately, these attorneys are experiencing the "risk" side of the "risk premium."  

Obviously, from the link above, H/T to David Lat at ATL.

Comments

[Anon]

If you think there's a fundamental difference between Cravath and Wilmer on the one hand and Skadden and Paul Weiss on the other, you're wrong. If anything, the latter two are in a better position.

Cravath's business model is concentrated on the big banks of New York and London. They took a 24% PPP hit last year and have a new very pricey lease kicking in in 2009. Wilmer is still struggling to absorb the Hale & Dorr merger of a few years ago and tried to ramp up in NY at exactly the wrong time.

Paul Weiss is one of the few firms to report an _increase_ in PPP in 2008 (higher PPP than Cravath now, incidentally). And Skadden is the most diversified of the top firms.

They all might have to engage in cost-cutting measures before this is over. But your notion that the white-shoe firms are somehow immune from this just doesn't hold water.

[Dan Filler]

Anon, you may well be right on the financials. My only thought was that some firms have hiring reputations so sterling that they would absorb the shock, and defer layoffs, longer than other firms. To my mind, Cravath at least imagines itself as being in a different reputational league than Latham. I'll tell you this: once Cravath does a public layoff, the stigma around layoffs is fully gone. Kaput.

[Anon]

Professor Filler,

Thanks for your reply. I agree on the Cravath effect with regard to a stigma. The question is, will Cravath ever do a public layoff? If things stay as bad as they are, maybe they will gradually shed associates for "performance" reasons to reduce headcount enough. Skadden or Paul Weiss is more likely to pull a public layoff, if that's what you're getting at.

The six-month severance by Latham is interesting. These costs won't be off their books until September, so they are presuming that a recovery won't be in sight even then. Scary.

[ads]

nice jab at crimson & maroon.

[G-law]

What strikes me as most interesting about this is the recognition that this may not affect LW's ability to recruit Crimsons, Maroons, Bulldogs or any other top law school grad in the future. This is probably a positive step and a rational realization that the mid-level market is one with lots of mobility anyhow - so those same Crimsons, etc., will be available as 3rd years, etc., when the markets turn.

Another interesting factor is that no partners were laid off, but that a reduction in leverage was suggested. Will this mean an effective increase in client costs (as partners do more "real work" that was delegated to associates? Or will this meant that we could once again see partner rates at biglaw hit the 400-500 mark? Time will tell.

[joe smith]

Law firms are lame-do something meaningful with your lives

[erik]

Prof. Filler,

While it's true we're seeing the BigLaw layoff stigma evaporate in the current economic environment, I think the comparison to GM and Citi is stretched. These companies are truly in crisis and losing untold billions of dollars - they need radical restructuring and would not survive outside bankruptcy without government support. GM is selling less than half the cars they sold a year ago, and Citi has hundreds of billions of dollars of assets that are worthless because no one will buy them. These companies are destroying value/equity on an unprecedented scale.

BigLaw is very different - even in the current environment, these are profitable businesses. Latham, for example, is laying off 12% of its lawyers in response to a 4% fall in revenue in 2008 to $1.9 billion from $2 billion the year before, and a 21% fall in PPP from $2.27 million to $1.8 million. I repeat, the average partner at Latham is still taking home $1.8 million in profits per year. These firms could easily keep all their associates employed, just not at a $2M PPP level and not for 2000 billable hours per associate per year. Thelen & Heller collapsed for the same reason - these firms were still profitable businesses the day they liquidated, but they fell behind in maintaining competitive PPP levels, partner defections increased to a point that they breached loan covenants, and the partners just closed up shop and moved on to other, more profitable, firms, and put associates and staff out on the street.

Associates have been widgets for some time - that's nothing new - it's just that associate widget-hood has been highlighted in much starker terms in the current environment.

[Joel]

Is there any truth to the rumor that more layoffs are coming at Skadden on or around March 27? Are they going to be concentrated in one office (perhaps DC?) or are these going to be firm-wide?

[air jordans]

I hope you all have a blessed day

[credit counseling]

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