Seyfarth Shaw Layoffs Could Be New Normal For BigLaw
Law360, New York (May 17, 2017, 9:01 PM EDT) — Tough decisions regarding attorney layoffs like those announced by Seyfarth Shaw LLP on Tuesday are likely to become commonplace in a market where demand for law firms remains sluggish, expenses are high following a pay hike for associates last year and firms are fighting to keep high profits for equity partners.
BigLaw is in a period of transformation and adaptation, competing with alternative legal service providers, accounting firms and in-house attorneys for work that is increasingly divvied up, handed out or automated. At the same time, firms are grappling with rising real estate costs and the price tag of widespread associate raises implemented last year.
Considering those factors, mass layoffs like the ones revealed by Seyfarth are not an aberration and are likely to become more commonplace, experts say, as law firms strive to right-size their workforces, root out underperforming team members and maintain high profits for equity partners in BigLaw’s new world order.
“This has nothing to do with Seyfarth and everything to do with what’s going on with the profession,” said Thomas S. Clay, a principal of Altman Weil Inc. “The reality is there isn’t enough work to keep everyone busy. This is what many law firms are going to have to do, and some have been quicker to act than others.”
The layoffs confirmed by Seyfarth Shaw Tuesday evening reportedly amount to 40 lawyers across all of the law firm’s U.S. offices and departments, plus a number of staff members. Chicago-headquartered Seyfarth has more than 900 attorneys in 13 offices worldwide, according to its website.
To support his contention that layoffs are the new normal, Clay pointed to recent cuts made by Reed Smith LLP — the firm laid off 45 attorneys in January 2016 — and Dentons, which has reportedly pushed approximately 20 partners out since January. And, according to Clay, others have been doing the same thing, but quietly and without fanfare.
“There are a host of things that have been changing in the market for a while now, but the pace is faster now,” he said. “You can no longer rely on natural attrition to take care of underproductive attorneys or ask one person to leave at a time.”
Peter Zeughauser of consulting firm the Zeughauser Group says he too has seen layoffs rolling across BigLaw for several years now.
“Some have been done quietly, some announced. There [are] more to come,” he said.
According to data released by Citi Private Bank’s law firm group, the legal industry saw tepid demand growth of 0.4 percent in the first quarter of 2017 and overall revenue growth of 4.9 percent, driven by billing rate increases and speedier collections.
“However, we saw the impact of associate salary increases in the 9.1 percent increase in compensation expenses, which drove an overall expense increase of 5.6 percent, outpacing revenue growth,” said Gretta Rusanow, head of advisory services at the law firm group, referencing pay raises initiated by Cravath Swaine & Moore LLP in June that were copied by a large swath of BigLaw.
Last year, Seyfarth held out on the wave of associate raises, with managing partner Peter Miller even telling attorneys in a memo he was monitoring the situation to make sure it was right for the firm and chair emeritus Stephen Poor penning a screed for Bloomberg BNA against the idea of the “keeping up with the Joneses” raises.
But Seyfarth eventually gave in, telling its employees in July it would raise pay on a similar level as the other large firms.
According to Mark Jungers, co-founder of law firm recruiting outfit Lippman Jungers LLC, it was inevitable that those raises would cause some law firms to shed lawyers.
“If the year is flat and the cost of labor goes up, there are not that many things law firms can do to keep their metrics the same or go up, and most of those things [that they can do] are not without pain,” Jungers said.
The raises “made sense” for law firms like Cravath, Skadden or Sullivan & Cromwell where the majority of work performed by the firms is not rate sensitive and additional costs can be absorbed by raising billing rates, Jungers explained.
“I’m not sure that, given the mix of work at this particular firm, that they were able to get enough more hours and raise rates enough to make up for the associate raises,” he said. “And also, I’m fairly sure [the law firm] did not want revenue per lawyer and profits per partner to go down … These lawyers are victims of a combination of needing your metrics to improve and at the same time paying higher labor costs.”
Seyfarth Shaw does a good deal of labor and employment law work — when the law firm opened in 1945, it was exclusively focused on labor law.
And although it is now a full-service firm doing work in a number of practice areas, the movement of labor and employment work in-house, as well as the rate sensitivity of the practice area, may have had an impact on the law firm’s bottom line during the first quarter of the year, according to Gloria Sandrino, global chair of partner and group recruiting at Lateral Link.
“I was not surprised about the Seyfarth layoffs,” Sandrino said. “The problem for Seyfarth is that in their case, the decline in demand is because labor and employment work is being performed more and more by in-house lawyers. This part of the equation is not likely to change anytime soon.”
Seyfarth Shaw has also been a leader in promoting innovation in the delivery of law firm services through its SeyfarthLean client service model — which combines the core principles of Lean Six Sigma process improvement with project management and legal technology — and layoffs may be a “natural result of that,” according to Clay.
“They likely have become more efficient and effective and found they can produce the same amount with fewer people,” he said.
Regardless of why the law firm decided layoffs were in the cards, the fact is they were not out of line with much of the rest of the law firm sector, according to Michael Rynowecer of BTI Consulting.
“Seyfarth Shaw doesn’t want to have to deal with overcapacity on a continuing basis. So the reduction in force seems larger — it is aimed at changing the economics of the firm,” Rynowecer said. “Seyfarth is making swift and decisive decisions. No one wants to see a layoff, but if a firm has to make them, they are better served making them in one, comprehensive move.”
By Aebra Coe
–Editing by Philip Shea and Kelly Duncan.