Economic Meltdown Meant Change For Many Firms
You've probably heard this elsewhere: It's been five years since the Wall Street meltdown of 2008. The anniversary has led to analysis of a whole range of economic issues. So it seems only fair to check in and see how the business climate for Connecticut lawyers and firms has been altered over that past five fateful years.
For starters, well-paid summer internships went from being an easy-going transition into the profession to hard-to-get gigs reserved for a select few at only the largest firms.
Business changed for veteran practitioners too. Practice areas involving real estate transactions, such as representing individuals and companies that buy and sell properties, slowed significantly, never to fully recover. Ditto for work in mergers and acquisitions, which hasn't rebounded to 2008 levels.
Instead, lawyers who handle labor and employment law found themselves enjoying busier workloads, helped by a new-found scrutiny of employers by the federal government.
"In the five years since the economic crash, all law firms — big and small — have had to adapt to a much different environment, which may be the so-called new normal," said Louis Pepe, a former president of the Connecticut Bar Association and partner at McElroy, Deutsch, Mulvaney & Carpenter.
The biggest change since 2008, Pepe said, is the realization that clients are in the driver's seat. There's been an impact on prices charged for services offered. And there's been just as big an impact on relationships among lawyers in the face of greater competition. "Legal services since then have been, and still are, offered in a buyer's market where more and more lawyers are competing for less and less demand," Pepe said. "How can that dog-eat dog atmosphere not adversely affect relationships with other lawyers?"
For many, the belt-tightening has dramatically altered billing arrangements.
"I think the big lesson learned from the recession, is we're all confronted with new legal environment, a new business model," said Stan Twardy, managing partner of Day Pitney. "The days of law firms simply raising their rates to increase their profits every year are long gone."
Twardy agreed that the legal marketplace has found itself under increased pressure from clients who want more value out from legal service providers. "Fee arrangements are something that continue to be very important," Twardy said. The traditional billable hour has, in some cases, given way to flat fees for cases and annual contracts.
Another lesson learned out of necessity from the economic downturn, was increased demand for efficiency and transparency for corporate clients. "Efficiency is paramount these days," Twardy said. Because large corporate clients have pushed back on legal fees, more firms are relying on less expensive document preparation contractors instead of using associates for routine tasks.
"We as law firms are going to have to rely more on contract work, and that is a model that is going to be here to stay," Twardy said.
As a result of the downturn, his and other firms have shifted the emphasis of some of their practice groups. "Because there aren't as many mergers and acquisitions as there had been in the past," Twardy said, "we've moved some of our lawyers into the hedge fund area of our business."
While the demand for sales-related transactions has slowed, lawyers have found opportunities handling other work. Especially representing corporate clients dealing with an increase in governmental regulations that sprung up after the economic meltdown.
At Jackson Lewis, for example, the darkest days of the economy was a boom time for its 31 attorneys in Hartford and Stamford who represent management in workplace claims. "In a contracting economy, there certainly was an uptick in numbers of cases," said Beverly Garafolo, the firm's managing partner.
Other firms, including Pullman & Comley, shifted gears and found new opportunities in growing practice areas that were shaped, in part, by the economic challenges. James T. Shearin, the firm's new chairman, said he envisions one future area of growth will be in the health care area, as a result of the Affordable Health Care Act.
"The health care field is ever changing and very complicated," he said, "But I recently read that health care spending is accounting for 20 percent of the GDP at this point, and as far as I can see, there's a lawyer needed at each phase of the health care system."
Rising energy costs have also created a need for alternative, cheaper energy, which Shearin sees as a potential business opportunity. "I think alternative and renewable energy sources, and the regulatory laws governing them when they are exploited, is going to be a huge issue going forward."
Finally, he said, the stagnant economy and reduced spending over the past five years on infrastructure has created a pent up need for fixed roads, bridges and buildings.
For example, he said, work has been going on for years at the Steel Point redevelopment project in Bridgeport. As the project gets moving closer to completion, he said, complicated legal work with regard to tax credits, and government bond issues will have to be addressed.
Last week, President Barack Obama marked the five-year anniversary of the collapse of Lehman Brothers, and the low point in a recession that started a few years earlier, by issuing a statement. Obama stressed the steps his administration took.
Those steps ranged from the unpopular Troubled Asset Relief Program, or TARP, that was used to shore up the financial industry and bail out General Motors and Chrysler, to the $800 billion stimulus bill.
"We came in, we stabilized the situation, Obama said in a televised interview on ABC's "This Week." He cited 42 months of economic growth, 7.5 million jobs, and a now healthy auto industry.
But to many members of the Connecticut legal industry, the bottom the national economy struck in September 2008 marked a dividing line that will never again be crossed.
"I do think the events of 2008 were in many ways transformational," said Dan Papermaster, the managing partner at Bingham McCutchen's Hartford office, and chair of its Transactional Finance Group. "The pressures that caused firms like Dewey & LeBoufe to collapse caused firms to recognize that effectively the legal industry was in a bubble, and the bubble burst."
Papermaster noted the change in the law firm landscape, as mid-sized firms struggled to keep pace with larger firms that were able to keep hiring top talent and negotiate mergers that allowed them to add practice areas — and provide more complete services for clients. "There is the widening of the gap in terms of revenue growth, between Am Law 100 firms and everyone else," he said.
Papermaster said his firm was fortunate to have a robust financial restructuring practice, which kept it busy when the financial markets were teetering. In recognition of the growing need to provide value for clients, his firm in the past year moved about 100 office support employees to a new Global Services Center in Lexington Kentucky.
The center provides centralized office space for accounting, library, conflict resolution and document preparation workers. "We can manage it better, it's a lower cost center. We operate our business in some of the most expensive sits in the world and it didn't make a lot of sense to have our back operations in those expensive locations."
The firm considered locations all over the globe, but felt Kentucky was the best location. As with other recent business decisions, the move of those workers was part of the firm's effort to provide value to its clients. "Firms that aren't looking at creative ways to manage their cost issues for their clients will find the future more challenging," he said.•