Predictions — Based On Empirical Evidence — For 2014

Predictions — Based On Empirical Evidence — For 2014

By Mark Herrmann | Above The Law | 06 Jan 2014 at 10:22 AM

This is my first column of 2014, so I’m due to join the ranks of those who make predictions for the coming year.

But my predictions will be slightly different from others, because mine will be based on fact.

In the last months of 2013, I heard that two different law firms had reduced partners’ draws to offset the firms’ poor financial performance. At least one of the firms reduced draws retroactively — announcing near the end of the year that partners’ salaries would be reduced as of January 1, 2013 (which slices partners’ incomes dramatically in the last few months of the year). Both firms shared the pain among all partners — folks suffered in the equity and non-equity ranks alike. (This is a particularly nasty trick to play on income partners: “Here’s your partnership deal: If the firm does better than expected, you’re a mere income partner; of course you will not share the wealth. On the other hand, if the firm performs worse than expected, we’ll permit you to share the pain, and we’ll cut your pay. Here’s the partnership agreement! Sign right here on the dotted line!”)

I’ve now been in-house for four years, and my ear has lifted pretty far from the law-firm ground: If I heard about two law firms suffering from such terribly bad years that they were forced to reduce their budgets as year-end approached, then I’m guessing that many more than two firms suffered this fate. This means that, for many firms, 2013 was not a good year, which leads me to my predictions for 2014 . . . .

First, we will see an unusually high number of lateral partner moves in the first two months of 2014. Guys who view themselves as heavy-hitters are not pleased to learn that their income has been cut retroactively by many tens of thousands of dollars (or more). Some of those unhappy folks will have the ability to change firms, and they will – after they receive their year-end payouts.

Moreover, 2013 does not seem to have been a devastatingly bad year for all law firms, so partners unhappy with their current homes should be able to find new homes that appear better able to thrive in the wake of the Great Recession. Hence, prediction one: A ton of lateral partner activity before March 1.

Second, law firm mergers will continue at their newly-accelerated pace. The leadership of firms that had bad years in 2013 have to prove to rank-and-file partners that the firms still have plans to improve profitability in the future. Merging with another firm expands your platform, increases your total revenue, and shows the world that you’re a creative leader. (Merging may or may not improve a firm’s quality, collegiality, or profitability, but that’s another matter. The key is to show action! Merging is activity, so it protects the firms’ leaders for a while.) Ergo, prediction two: A continued stream of law firm mergers.

Third, another major firm will collapse within the next 15 months.

Here’s my conjecture: The last time I heard about firms retroactively reducing partners’ draws was 2009, and the next couple of years were pretty hard on law firms.

If firms are again experiencing financial distress sufficiently severe to force them to retroactively cut partner pay, then the law firm herd is once again about to thin. I don’t know enough about the finances of specific firms to name names here (and, even if I had the information, I’d hold my tongue — because I do work for the world’s leading insurance broker for law firms), but I’m going to guess that we’ll see at least one Am Law 100 firm shutter its doors between now and the end of March 2015.

This column makes me feel a little like Yogi Berra: “It’s tough to make predictions, especially about the future.”

But I have one piece of empirical data, and I’m guessing that what I heard is just the tip of the iceberg. If so, then the corporate world may well continue to prosper in 2014, but at least a few law firms will be in for a hard year.

Let’s hope I’m wrong. I wish for law firms what I wish for you — that the new year is a happy one.