Bankruptcy Practice Leads Law Firms Out of Recession

By Larry Bodine

The recession in the legal profession appears to have bottomed out, according to a new Hildebrandt Peer Monitor Report for the second quarter of 2009.

The bright spot is that demand growth, defined as growth in billable hours, for bankruptcy is up 22% compared to a year ago. However, hours billed to litigation, patents, IP litigation, labor & employment, M&A, tax, corporate and real estate are all down.

Business bankruptcy filings increased from 14,319 nationwide in Q1 2009 to 16,014 in Q2, according to the American Bankruptcy Institute.

“While it is uncertain whether the industry has reached the official bottom, it appears that at the moment, things are at least not getting any worse,” writes Mark Medice, author of the report. “Tentative signs of demand stabilization suggest a potential bottoming from the first half of the year. However, a robust turnaround is not in sight, and demand and pricing environments are likely to remain challenging, with only minimal improvement at best in the next few quarters.

“However, litigation appeared to be strengthening, especially for more premium matters. If this trend continues into the second half of the year, it will help mitigate – though not completely make up for – the shortfall in other practice areas,” the report states.  “Demand growth, should show signs of recovery in the second half of the year if the general economy continues to improve. However, any such improvement, if it occurs, will be modest at best.”

“It is expected that transactional practices will begin recovering in line with improvements in the general economy. As these practice areas are often a leading indicator as business activity increases, any positive trends that emerge in the coming months will be a sign of improving overall market conditions,” the report says.

Finding profits by cutting expenses

However, it was cost-cutting that returned firms to profitability. In response to weak demand and rates, firms have cut costs across the board. For the first time in four years, Medice recorded actual contraction of both direct and overhead expenses, rather than merely a slowing in rate of growth.

“Direct expense growth peaked several quarters ago at more than 20 percent and has fallen dramatically since then. In the second quarter, it fell into negative territory for the first time, falling 1.8 percent. Much of this has been achieved through headcount reduction along with adjustments to compensation structures. Firm headcount was down two percent in the second quarter, a slight acceleration of the reduction seen earlier in the year. Although overall headcount is still higher than a year ago, the trend line is pointing toward continued, if not accelerating, headcount declines in the coming months. Many firms began layoffs, consolidations, and delayed start dates late in 2008.”

According to LawShucks.com, the torrent of law firm layoffs has slowed down to a stop as of August 14, 2009.  A total of 11,369 people working in law firms have been laid off this year (4,265 lawyers and 7,094 staff).   

“With severances and lags in departure dates, the full effects of headcount reductions are now starting to be felt. The impact of headcount reductions should continue to provide favorable year-over-year comparisons for direct expenses through the remainder of the year.”