December 31, 2008

THE SAN DIEGO DAILY TRANSCRIPT

SAN DIEGO – While the real estate, banking and auto industries have been hit hardest by the current recession, every business is feeling the affects of the economic turmoil.

The legal community is no exception, and the prospects for 2009 are grim as well.

“I’ve never seen anything affect every facet of the economy (like this),” said Larry Watanabe, a partner with the legal search firm Watanabe Nason. “Law firm mangers are uncertain and nervous as to what’s going to happen in ’09. Most everyone agrees it’s going to be a bad year. Most are praying for it to be flat.”

The uncertainty surrounds how bad the economic slump will get and how long it will last. Most experts predict the economy will start to bounce back in 2010, at the earliest.

“So it’s very scary,” Watanabe said. “Everyone is trying to hold on to the bottom line.”

The biggest concern for law firms heading into next year is collecting fees from their clients as all businesses struggle with their finances.

“Receivables are good by most accounts,” Watanabe said. “The question is, when will they actually see the money?

With many businesses folding or consolidating their operations — most notably Bank of America’s (NYSE: BAC) acquisition of Merrill Lynch and Countrywide and the bankruptcy of Lehman Brothers — there is less work for law firms to do.

This trend likely will continue in 2009, putting a strain on law firm revenues.

“Firms only survive by having paying clients,” said Jeff Joseph, associate dean at Thomas Jefferson School of Law, “and as more and more business fail, there are fewer and fewer clients that will be able to afford the fees.

“And there’s not a lot of business being transacted. Transactional lawyers, more than litigation attorneys, are finding it challenging to keep up with billable hours.”

In order to survive, law firms will have to become more innovative in the ways they charge their clients. It’s likely that next year firms will seek alternatives to the traditional billable hours model, including using a retainer system.

“Clients are really asking their lawyers to step up and be part of the solution and not just be a paid vendor,” said Kurt Kicklighter, managing partner-elect of Luce, Forward, Hamilton & Scripps LLP. “I think all firms will manage their relationships more closely in terms of how they work with clients more effectively and efficiently and set clear objectives in cost and service.”

Firms typically raise billing rates each year, a trend that may end in 2009. Watanabe said firms are already wondering how they would be viewed if they raised rates.

In the upcoming year, according to Kicklighter, law firms will concentrate more on the business side of operations and not just on the practice of law.

As during any bad economy, analysts expect the practice areas of bankruptcy and litigation to remain steady, if not experience growth.

Thomas Jefferson’s Joseph said subprime mortgages will be a fertile practice area as people renegotiate their mortgages and take advantage of the “truth in lending” act.

Practice areas expected to decrease in 2009 including real estate, banking and anything dealing with the capital markets, according to Watanabe.

“Real estate is way, way off and will be way, way off for the foreseeable future,” he said.