We have heard some initial reports about how many firms are "looking forward" to a resurgent 2010.  There is nothing about the prospects for broad scale  work flow that looks excitingly "up" for most BigLaw firms in  2010, nor meaningful changes in operations that individually or collectively on the cost side could move the needle in a boldly positive manner (that exercise was explored already).   Job cuts to "right size" the firms for the work available have largely been accomplished, and while thefinancial burden of severance should be pretty much fully burned off as at 12/31/2009 for most firms, there is in many instances an increase in the per capita allocation of fixed costs because of fewer heads to support them. 

     How is a vigorous return to stong net distributable revenue growth going to happen in "real" terms in 2010?  The answer has to be that it is not going to happen in real terms.  But it IS going to happen that there will be gains in PPP .  Here is how:

Last year(2008) the net partner incomes reported to the American Lawyer were often in the "down 4%" range.  A few noted they were down double digits, and many said they were flat or marginally off of their revised budgets.

"Revised" budgets.  If you take about ten seconds to reflect on that term....there is no place for it.  Not just because in business one sets an initial budget as a reference point to then go back and measure against, but because nobody in their proper frame of mind would consider such a thing.  If performance was better than budget.....or worse....why would you "raise" the target and thus reduce the measure of success or achievement?  So the only time the budget will be "revised" will be to bring it down, and thus in comparison make the delta between budget and actual performance smaller. That is, distort the real picture.

Forecasts are changed all the time. Forecasts are to help the enterprise look into the future and facilitate change to improve operations.  To meet or exceed budgets.   But the initial budget is just that, and cast in concrete. But there were many firms that revised their "budgets" two, three, even four times throughout the year.  Then reported to the American Lawyer magazine that they were down "only" 4%.  Note that "management", though cognizant of budgets and forecasts, should be devoted to achieving the best outcomes for the enterprise, irrespective of budgets or forecasts.  Management that is "up" ten percent over budget relative to a market that is "up" twenty percent....did not do such a great job. (Recall Peter Drucker's comment that "management" is doing things the right way; while "leadership" is doing the right things.)

The reality is that in 2008 many large law firms experienced reductions in net distributable income to equity partners on the order of 15% to 30%.  You can get corroboration of this in two ways.  One is to talk to equity partners in major firms.  A second is to pull up the publicly filed financials for the Magic Circle and other major UK firms, who must file them and use registered accountants, so the potential for "flexible financial engineering" is materially reduced. You will see that the magnitude of those reductions to net distributable partner income were pretty typical.

What has transpired in 2009 after massive cost cuts?  The massive layoffs, which were in fact much greater in number than announced because of voluntary "counselling" departures that were registered as "voluntary".  What did the firms get?  Another round of significant pain in the realm of net distributable income, notwithstanding the hard sacrifices made in layoffs of staff and attorneys, and strong cuts to every conceivable line item expense. Though the results are only beginnng to trickle out, reductions on the order of 20% against initially projected distributable net income to partners are not going to be uncommon.  Now, one has to acknowledge that different firms will have handled the budgeting for 2009 differently...some will have been overly conservative and others overly optimistic, and thus variances to budget are of limited utility.  Comparability in what went into partner pockets is the first real metric that matters to partners.  If partner X receives  $850,000 at Law Firm A for his book of business, does partner Y receive the same for her book of business at Law Firm B?  If the delta gets large enough to overcome the inertial resistance to change of venue, the lateral movement comes.  So firms defensively want the distributable income to be as high as they can push it to keep their resources together, as well as to attract new talent from other firms, talent that will bring business.

None of this at the moment is being meaningfully addressed with changes to improve operations, to make them more efficient or client friendly. That takes hard work, and time to implement.

The next round for 2010 is already clear.  The cuts that could be made, have been made, with respect to overstaffing for available work flows and expenses.  The net result, as witnessed in 2009, was that the bottom line impact was not sufficient.  So what next?  Two major initiatives.

On the associate side we see already the abandonment of the lockstep system and the rolling our of the tiered advancement and compensation system.  Putting aside all the talk about how great this is going to be.........if you just analyze the tiers one should see an average compensation reduction on the order of about $30,000 per associate per year. Not for all firms, but for many. How that translates to equity partners income is difficult to say with precision, but assuming roughly two associates for every one equity partner, that would be $60k per year per equity partner.  That is a lot.

The second initiative that is evolving, more quietly, is the across the board income reduction for non-equity partners.  That is emerging as somewhere in the range of 20% as a class.  Some of the stronger performers will not suffer cuts, or they will be much less.  So the weighted impact will be much heavier on some of these partners.

If you cut income partner/of counsel comp by 20%, and their rank is about equal in number to equity partners, and their average income is now around $350k that will result in somewhere around $90k per year per equity partner as an income transfer.  

Factor in a culling of at least 10% of the equity partner ranks, and some internal reallocation of income as among the remaining equity partners,(particularly in single tier partnerships) and there will be little pain at the top.  That is how this is going to work for the industry in general to maintain income levels.  Note that a $150k transfer will work a very major impact on reported PPP. 

It is not "management" in the sense we were taught in business school.  And it is certainly not "leadership" in the sense we were taught at Sunday School or Temple. But that is what is happening right now. That is how I see what is going on, at this moment.  I might be wrong.  But so far..................

What this tells me is that things are very stressed in big firms.  More than we might have suspected.  This will impact alternative fee arrangements receptivity.  And it will impact the very survival of some firms.  Soon. 

Watch for an amazing flurry of lateral moves in the first quarter.  Then..................nada.