The legal industry is currently facing a period of inconsistency and division, as illustrated by recent layoffs in BigLaw firms and the divide in the market caused by associate pay raises.

BigLaw Layoffs Amidst Growth Mindset

Despite a mindset geared more towards growth, layoffs and cuts continue to rattle the industry. Several BigLaw firms trimmed their ranks in 2023 and deferred associate classes amid economic headwinds and depressed demand, including in technology and corporate practices. This has led to a situation where firms that once aggressively hired to meet surging client needs are now finding themselves overstaffed as transactional activity slows down.

Fenwick & West, for instance, laid off “just under” 10% of its professionals, citing a surge in demand from 2020 through early 2022 that led to aggressive hiring. However, as transactional activity slowed in 2022 and 2023, the firm’s talent levels became misaligned with existing and projected client demand. This has led to a significant impact on the firm’s people today, as stated by Richard Dickson, the firm’s chair.

"Our talent levels became misaligned with our existing and projected client demand, particularly in our large transactional practices. I take responsibility for this and am truly sorry that those decisions have led to a significant impact on our people today," said Fenwick & West's chair.

Goodwin Procter also let go of an unspecified number of associates earlier this year, though it cited annual performance reviews as the reason. Last year, the firm cut attorneys and staff due to economic headwinds and a slowdown in demand. These layoffs highlight the inconsistency in the market, with some firms making impressive gains while others face challenges, particularly those tied to the tech sector.

Associate Pay Raises Divide the Market

On the other hand, associate pay raises have divided the industry. Several large law firms based in Washington, D.C., have matched the latest associate compensation scale of top firms, but others have stopped short of announcing changes. Covington & Burling; Wilmer Cutler Pickering Hale and Dorr; Arnold & Porter Kaye Scholer; and Hogan Lovells are among the major firms that will pay salaries starting at $225,000 for first-year associates and up to $435,000 for the class of 2016 and on.

However, not all firms have followed suit. Some firms haven’t announced changes or haven’t decided, and an American Lawyer analysis last year found that most of the law firms that have matched the scale have profits per equity partner above $2 million a year and more than a billion dollars in gross revenue. This suggests that only the most profitable firms are able to match the top compensation scales, further dividing the market.

The Future of the Legal Industry

The current state of the legal industry underscores the need for firms to diversify their client base and adapt to changing market conditions. While some firms are thriving, others are struggling to maintain stability and competitiveness. As the industry continues to evolve, law firms will need to navigate these challenges and make strategic decisions to ensure their long-term success.

“They [Firms] haven’t diversified the industries in their client base to the point where there’s a lot of rightsizing happening in the moment. I think these firms will probably have to have difficult conversations” in order to be competitive, said New York recruiter Katherine Loanzon. “It’s going to affect the way associates see these firms because long-term stability is important for a lot of associates.”

In the face of these challenges, firms will need to reassess their strategies and consider whether aggressive hiring or matching top compensation scales are sustainable in the long run. Firms will also need to consider how they can diversify their client base and adapt to changing market conditions to ensure their long-term success.

Michelle Fivel, a legal recruiter and co-founder of Hatch Henderson Fivel, commented that based on information from transactional people on the ground, and based on the macroeconomic environment, this year is going to be incrementally better than last year. “But the real business, the real bump will come in 2025, and I think that’s a long time for firms to hold on to excess capacity. And again, I think firms are looking at the capacity they have and making some tweaks.”

The legal industry is at a crossroads, with firms needing to balance the need for growth with the realities of the market. The decisions made now will shape the future of the industry, and it remains to be seen how firms will navigate these challenges. One thing is clear: the legal industry is in a state of flux, and only those firms that can adapt and evolve will thrive in the long run.