From the perspective of the broader economy, the current situation bears an unfortunate resemblance to the downturn of 1990, in which the savings and loan crisis created a ripple effect through the real estate and financial markets, premium billing dried up, and dealmaking suffered. We are already seeing many similarities in law firm statistics of the 2007-08 period and the period just before the high-tech bust of 2000-01.
Then, as now, there were increases in head count, attorney leverage (associate-to-partner ratio) and associate salaries. At the same time, firms have entered 2008 with a sharp decline in demand for legal services – from 7 percent growth in the first half of 2007 to just 3 percent growth in the second half. Firms are also experiencing margin compression, with expense growth outpacing revenue growth at a rate we haven’t seen since 2001.The good news is that firms now have higher capital levels and lower debt than in other recent downturns, so that during any recession or market softening, a well-diversified firm may be able to avoid having to resort to large layoffs or other drastic measures.
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