July 21, 2009 2:58 PM
Welcome to the Future: Morgan Lewis Signals Armageddon
Posted by Paul Lippe
There's no way to overstate the importance of last week's announcement by Morgan, Lewis & Bockius that the firm was canceling its summer associate program and on-campus interviewing (OCI) for the summer of 2010.
Morgan Lewis, along with perhaps Latham & Watkins, Orrick, Herrington & Sutcliffe, and a few others, is the prototype of the large, rapidly growing, global non-NYC based firm that has been a model for the last decade.
OCI is not just any activity for a big law firm. It is, in the language of modern business, the core process of a large law firm. The whole value proposition of a large law firm is built around the syllogism: "We hire the smartest people from the best schools. They work the hardest and do the best work. And we charge the most money." The whole profitability model has been built around charging for the time of young lawyers. If firms cease--or even suspend--this hiring process, it will have big implications for their identity.
In past legal recessions, firms did not want to be seen as cutting back on law school recruiting for fear of getting a black eye and then not being able to get the hiring flywheel spinning again. Morgan Lewis' willingness to take this hit now is an implicit admission that the road ahead will be long and full of change, and that just keeping a 'stiff upper lip' to protect the firm's reputation isn't a very smart play. Francis Milone, the head of Morgan Lewis, is well regarded as one of the top law firm honchos in the country. If he's going down this path, then many, many firms will follow. And as a result law schools, too, will be forced to change.
If we've learned anything from the financial crisis and Detroit's troubles, it is the urgent necessity to "mark to market," to correctly set prices based not on wishful thinking or yesterday's sense of entitlement but on reality. Every penny of law firm spending will get tested by the question "is this critical to adding value to clients--and therefore generating revenue and enhancing the firm's competitive position--over the next 18 months?" Unless the answer to that question is a resounding "yes," stop the activity you're engaged in, immediately.
Let me suggest several obvious places where law firms will start marking to market:
-Firms will turn to their publishers and technology vendors and say "hey, we're buying more or less the same stuff from both of you, and it's pretty darn similar. So here's $500,000 for one of you (instead of $1.4 million for all of you), one of you guys can have it, and you have 15 minutes to decide if you want to be that guy."
-Firms will turn to their landlords (unthinkable in the days when the landlord was often the bank and a key client) and say "we know our lease says $21 per square foot, but the current market rate for new rentals is $11 per square foot. Our competitors are at market and we have to be at market. And, by the way, we're cutting 100,000 square feet no matter what.
-Firms will turn to their own partners and say, "In 2003, we got a referral from the Really Great Offsites Law Firms Network, but we're still spending $75,000 a year to belong. While we realize you (and your spouse) enjoy the annual Zurich gabfest, we just can't continue the membership any more."
I kicked this column off last fall by referencing the wine movie Bottle Shock, set in California. I'll cite another such movie now, Sideways (I have nothing to say about Paul Giamatti's aversion to Merlot, I just like the title). From now until the end of 2010, we'll be in a Sideways economy: little growth as we work through the asset bubble deflation.
What does this mean for law firms? When this started, some folks (not me!) claimed that law was counter-cyclical. Others have been peddling "green shoots" fantasies. I think any serious person in this business now acknowledges that the recession will run through the end of next year and the only way to come out on top is to lead the organization through dramatic change.
If you didn't realize this before, Morgan Lewis just stamped it on your forehead.
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