By Gina Passarella, From The Legal Intelligencer

The slowdown in litigation facing the country’s largest law firms has not only raised the specter of layoffs, but has also revealed that firms have made some of the same old hiring decisions in building back from the recession and may need to once again restructure.

Firm leaders and bank surveys alike have for months reported a softness in the litigation sector with high-end corporate work lifting those firms that could get it in 2014. And last week, litigation firm Kasowitz Benson Torres & Friedman, an Am Law 200 firm that saw a 14.6 percent rise in gross revenue last year, laid off a chunk of attorneys and staff for the second year in a row.

According to the Above the Law blog, upwards of 40 people could have been affected in this month’s cuts. The firm’s founding partner told Bloomberg that Kasowitz Benson had a strong year in 2014 but was facing a litigation market that was “volatile and unpredictable.”

Some Pennsylvania firms have reported litigation remained steady last year, but making sure there are new matters in the pipeline is the tricky part.

Few who spoke to The Legal said they expected any large-scale layoffs among Am Law 200 firms, at least immediately. But consultants pointed to a potential permanent shift in clients’ approach to litigation and the subsequent need for firms to adapt. The problem is guessing right as to whether the softness in the market will be permanent or not.

Kent Zimmermann, a Chicago-based consultant with The Zeughauser Group, said a lot of managing partners are asking that question and his shop is predicting there is a permanent shift under way.

Zimmermann pointed to three main reasons. Going as far back as 2008, clients showed a noticeable loss of appetite for engaging in litigation and that has not come back even with the improvement in the economy. Technology has increasingly replaced a lot of the work that was done by junior associates, particularly when it came to document review. And, similarly, clients are increasingly looking to less expensive, more efficient ways of accomplishing certain pieces of litigation, such as the use of contract lawyers, off-shoring, legal process outsourcers or smaller firms, Zimmermann said.

“I am not expecting a wave of layoff announcements, however, most high-performing firms continually address overcapacity quietly by counseling out (asking to leave) partners and other lawyers who chronically are underproductive in terms of billable hours on a multiyear basis,” Zimmermann said.

Many of the issues Zimmermann highlighted have been discussed for years. So why are firms noticing now?

Zimmermann said cases take a long time to resolve, so the pipeline may be clearing now, and firms are often slow to react. That is particularly the case when it still is unclear whether this is a permanent shift.

Ward Bower of Altman Weil said that if this is a fundamental shift, there will be layoffs. But for now, some firms will try to avoid layoffs and work their way through the downturn.

Bower said the corporate work in the general-services firms masked the slowness of litigation, but as firms take a look back at their 2014 results, they are realizing the significance of the dip in demand.

“I’m not sure what you’re going to see, but I do think that the firms most alert to the change in client buying patterns will be actively looking at the restructuring of internal resources,” said Duane Morris Chairman John Soroko.

Soroko said smart firms will have less of a one-size-fits-all approach and begin moving resources where they need to be. What form that will take is difficult to say. But Soroko said firms may stop asking how many new lawyers they need and instead ask what skill sets and what rates are necessary on what client teams. He said that is even more true for litigation because it is the most labor-intensive.

As one firm leader noted, firms may have looked to right-size in the height of the recession, but as the economy improved, they built back up. Now, that firm leader said, firms are starting to ask whether they should have hired an associate to fill the associate spot left vacant through a layoff or if they should instead have staffed up on, say, “a staff lawyer in Idaho.”

The point is that firms can’t structure themselves on the typical partner-associate model but have to think of lower-cost ways to handle certain matters. A clear theme from law firm leaders reflecting back on 2014 has been that improving project management skills was a key to much of the success they were able to achieve.

The number of firms actually making structural changes, however, is not that high, Bower and Zimmermann both noted.

“I think that firms would be wise to listen to their clients and understand how their clients want to get work done,” Zimmermann said.

If a client wants to send some work to an LPO or a smaller firm, the larger firm should accommodate that, he said.

“I give firms a lot of credit for doing something about it,” Zimmermann said of those firms that are making changes. “Many firms are like frogs in boiling water.”

Zimmermann, who warns firms not to be complacent on this issue, said there is a risk of jumping out too late.

Bower said the firms that have restructured by doing things such as in-country outsourcing and using staff attorneys are in the minority.

“A lot of the Am Law 200 firms, for the most part, are much more traditional in their model and that is the partner-associate model,” Bower said. “I think it will change but it will not happen overnight. These firms are pretty conservative and slow to change.”

And for many general-services firms, there isn’t enough of a problem with litigation, at least at this point, to warrant any large-scale cutbacks.

Blank Rome Chairman Alan Hoffman said litigation demand is not consistently increasing for the industry like it used to and that has caught some by surprise in the last few years.

“But I don’t think you will see firms, other than a firm very focused on litigation, that will have layoffs,” Hoffman said.

Cozen O’Connor President Michael Heller was also doubtful of any sweeping cuts.

“If … litigation continues to dip meaningfully on an industry basis, I think all law firms will be hit by it, not just those that are solely litigation-focused,” Heller said.

But he said his firm hasn’t felt that yet, perhaps because of its unique practice mix or diversity of industry focus.

“I don’t believe that firms are anticipating a downturn in litigation and in advance making personnel changes in anticipation of this,” Heller said. “I don’t think that it’s that profound that law firms are making big changes or are going to make big changes. The Kasowitz change is probably a little bit of an outlier.”

But regardless of whether a dip in litigation demand will result in layoffs, client demands for value and efficiency do seem to have law firms examining the way they provide services. And in order to make alternative fee arrangements profitable for the firm, the model has to change from pre-2008.

So perhaps as Zimmermann said, firms will quietly reduce head count at a more measured pace for reasons including but not limited to general counsel’s current aversion to litigation.

For more onthis story go to: http://www.thelegalintelligencer.com/id=1202720607816/Litigation-Lag-Reveals-Law-Firms-Making-Same-Mistakes#ixzz3UYeNG17q