From Big Bonus to Unemployment Line?

If New York City could lose Bear Stearns, Merrill Lynch, and Lehman Brothers, could Washington lose Arnold & Porter, Hogan & Hartson, Covington & Burling, Howrey, or Akin Gump?

Law-firm partners ordinarily receive periodic draws based on the firm’s estimated profit. At the end of the fiscal year, when all fees are tabulated, partners’ draws are adjusted depending on how well the firm did.

Usually firm managers try to lowball revenue estimates and then surprise partners with a bigger-than-expected bonus. That final paycheck will come after the first of the year, after all bills and accounts for 2008 are tallied. Many law firms are worried that adjustments will be small or that revenues will not make the estimates. So end-of-the year cost cutting has been rampant.

Partners worry that the revenue for year-end paychecks may not be there—and a bonus, for the first time in years, may be out of the question.

Meanwhile, firms such as Howrey and WilmerHale have seen declines in deal activity that an increase in litigation work may not make up for. Howrey, which has spent big money establishing European offices, is feeling the effects of the global slowdown. Wilmer counted mortgage casualty Fannie Mae as one of its largest accounts.

Firm leaders say that some partners scheduled to retire late this year have postponed their plans because of drops in the value of their IRAs and other retirement vehicles.

“This is putting a squeeze on the younger lawyers,” says one lawyer. “There will be a sharp decrease across the board in the number of associates who make partner.”

Seventh-year associates at top Washington firms make around $300,000 a year. Typically their draw as partners increases by some 25 percent, but their billing rate usually rises by only 10 to 15 percent in their first year as a partner. Until the new partner can bring the billing rate up, that causes further trouble for a firm’s bottom line.

In good times, a firm is happy to take the loss for a year—but this is not a good time. Associates are on notice that the number of partnerships may drop.

So far none of DC’s iconic law practices has gone the way of the New York brokerage houses. Sixty-three-year-old Akin Gump is actively seeking a merger partner. Arnold & Porter’s ground may be shaky—its average partner profits were already behind its competitors’, and in recent years it has tilted its emphasis to representing banks, a sector that is now cutting back.

Covington tends to budget conservatively and seems to be in the best shape. Hogan & Hartson has a diversified client portfolio with a large interest in healthcare clients, and that will help it.

For years, experts have been predicting a consolidation in the lawyer industry akin to what happened in the accounting arena when the big eight became the big three. There probably will never be just three big law firms, but as banks and brokerages go poof, law-firm leaders say, some well-known firm names may not be far behind.

This article first appeared in the November 2008 issue of The Washingtonian. For more articles from that issue, click here.  

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Kim Eisler