Texas law firms staffed up. What now?
Texas corporate law firms spent much of the past decade booting underperforming partners, eliminating less profitable practice groups and hiring fewer rookie lawyers in an effort to grow profits.
New Texas Lawbook data show that the years of stingy hiring practices ended in 2019. Corporate law firms in Houston and Dallas went on a relative hiring spree last year, growing in lawyer count by 3.6 percent, compared to less than 1 percent each of the previous five years.
But legal industry analysts say the long-awaited growth may have occurred at exactly the wrong time, citing the one-two punch of COVID-19 and plunging oil and gas prices.
Most large corporate law firms in Houston depend heavily on energy industry mergers and acquisitions, which have come to a near halt. High-stakes business litigation is on hold because courtrooms are closed due to the pandemic.
As a result of the loss of high-end legal work, several large and successful corporate law firms in Texas are scrambling to cut costs. Baker Botts, Norton Rose Fulbright and a half-dozen other law firms with offices in Houston announced last week that they are temporarily reducing compensation to partners, counsel and associates by as much as 30 percent. More
“Massive layoffs have repercussions, and they hurt a law firm’s credibility.” Vinson & Elkins Chairman Mark Kelly
firms are expected to make similar salary cuts.
“It could get very bad, and the Texas legal market will take an even bigger hit than others,” said Jim Cotterman, a principal and legal industry consultant at Altman Weil.
“Law firms should hope for a short-term skirmish but prepare for a long-term siege,” Cotterman said. “Law firm leaders need to be brutally honest with their folks right now that they are planning for considerable reductions in expenses and in compensation and that this will be across the entire law firm.”
The combined lawyer count at the top 50 corporate firms in Texas jumped from 6,889 in 2018 to 7,130 last year — an increase of 241 attorneys. By comparison, those same 50 law firms added only 194 lawyers for the four previous years combined.
“For the past several years, the pool of business lawyers practicing in Texas has remained flat, which is not what we would have expected in such a thriving economy,” said Kent Zimmermann, a law firm consultant with Zeughauser Group in Chicago.
“At the same time, dozens of national and regional corporate law firms have opened offices in Texas and are hiring local lawyers from existing firms instead of bringing in new talent from their other offices,” Zimmermann said. “The result has been lawyers jumping from one firm to another in a law firm version of musical chairs.”
The Texas legal market has needed to grow faster for several years, Zimmermann said. Just not this year.
Summer additions
“No one could have predicted a pandemic that would shut down the entire economy nine months or even three months ago,” Zimmermann said. “What seemed like good strategic planning a year ago is now a drain on cash-flow.”
Even more worrisome, most of the Texas corporate law firms have scores of law students they are paying to spend the summer with their partners in hopes of hiring them in the fall. These “summer associates” were scheduled to show up in midMay, but most firms have delayed their arrivals until midJune at the earliest.
Then there are last year’s summer associates — hundreds of them — who were extended job offers a year ago and are expected to start work in September or October. FYI: Corporate law firms pay their rookie lawyers right out of law school $195,000 a year.
“The economy is contracting. Now is definitely not the time to be hiring new lawyers,” Cotterman said. “The legal profession is 13 percent to 15 percent overstaffed. I’ve been trying to tell firms that they have too many people for the legal work that is out there.”
The good news, according to Cotterman and Zimmermann, is that most Texas law firms went into the crisis with strong balance sheets and solid lines of credit to tap.
Baker Botts Managing Partner John Martin said the firm instituted salary reductions for the next three months to ensure that layoffs will not be necessary.
“We are a very conservative law firm,” Martin said in an interview earlier this month. “We are evaluating everything — how bad will it be and how long will it last. We are all operating in the dark.”
Rolling with changes
Vinson & Elkins Chairman Mark Kelly agreed that all law firms will take a hit because of the combination of the COVID-19 crisis and the decline in oil and gas prices.
“Good lawyers are needed in hard times,” he said. “We hope things don’t get uglier, but we are a low-debt law firm and we had a great couple months coming into this.”
Kelly said V&E, which employs the most corporate lawyers in Texas and has the highest revenue of any law firm operating in the state, still plans to have about 100 law students participate in its summer associate program year — albeit possibly delayed for a few weeks — and to add 90 first-year lawyers in the fall.
“I don’t like to make shortterm decisions,” Kelly said. “In 2015, some firms had layoffs to cut costs, but those firms suffered when the oil market bounced back. Massive layoffs have repercussions and they hurt a law firm’s credibility.”
The bad economy and oil price crisis is actually an opportunity for several law firms with strong bankruptcy and restructuring practices, such as Kirkland & Ellis, Weil Gotshall, Norton Rose Fulbright, Sidley Austin and Haynes and Boone.
One beneficiary could be Houston-based Porter Hedges, a mid-sized full-service law firm with about a 100 lawyers and solid connections in the oil patch. The firm was hired last week to handle the multibilliondollar Diamond Offshore Drilling bankruptcy along with lawyers at Weil.
“Clearly there is going to be an impact on us and every other law firm,” Porter Hedges Managing Partner Rob Reedy said. “We are healthy and our finances are in great shape. Our (lower) rates put the firm in a very good position to be competitive during tough times for our clients.”