Like most other businesses, law firms, too, are suffering the economic effects of COVID-19. Although many lawyers are able to work just as efficiently from their homes as they can from their offices, the impacts of COVID-19 on clients often get passed through to lawyers. The below chart from the Institute for Supply Management–Houston is a general indicator of economic growth or contraction in the greater Houston region. It is based on a monthly survey of purchasing managers that collects data relating to orders, employment, sales, inventory prices, and other factors. This chart illustrates how the current economic impact in the energy capital of the world is greater than both the 2008-09 financial crisis and the 2014-15 oil crash:
When clients begin to struggle financially, they look for ways to reduce expenditures. This includes cancelling deals, suspending ongoing projects, and seeking rate discounts from their lawyers—on what legal work remains. Some firms also have suffered from client bankruptcies. There is typically a 60-90 day period of exposure between the time when legal work is done until it is paid for. As such, each bankruptcy generally leaves law firms unable to collect fees for several months of work.
Fewer deals, the push for reduced fees, client bankruptcies, and concerns about the general downturn have resulted in a growing number of law firms taking measures of their own. These include pay cuts, reduced partner distributions, furloughs, sabbaticals, freezing class years, reassessing bonuses, and even layoffs. Two recent articles summarize the measures that have been publicly announced by various law firms:
- Pay Cuts, Layoffs, and More: How Law Firms Are Managing the Pandemic (Law.com May 22, 2020) (link); and
- Coronavirus: How Law Firms Are Handling The Downturn (Law360.com May 26, 2020) (link).
The below image from Law360.com is a nice snapshot of how firms have addressed the situation:
It’s worth pointing out that the top firms (according to Vault’s rankings) have not (yet) announced changes to their compensation or staff. Their changes have mostly been to summer associate programs, which tend to be focused on minimizing the transmission of COVID-19 and maintaining social distancing. The high rates charged by these firms provide more of a cushion. For them, it’s not whether or not their associates will remain profitable, but how profitable will they be.
The mindset of at least one of these firms is captured in the below email from a partner who sits on the respective firm’s global management committee. The email was sent to associates during the darkest days of the COVID-19 crisis:
For those of you that aren’t fully occupied right now . . . because they have been hiding, let me spell out reality for you real quick. I am seeing a ton of money being left on the table on the matters coming in and I have seen all of your hours today (from most junior associate through SP). I am pretty shocked and the math is not going to work out well for you at the end of the year.
Perhaps we will never hear about the top Vault firms’ pay reductions because they will simply implement them at the end of the year—in the form of reduced bonuses.
About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 148,739) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development), and co-author of the award-winning travel compilation, Strange Tales of World Travel (Bronze Medalist, IPPY Awards for Best 2019 Travel Essay; ForeWord Magazine Finalist for Best Travel Book of 2019; North American Travel Journalists’ Honorable Mention for Best Travel Book of 2019).
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