By Aebra Coe

Law360 (September 2, 2020, 7:39 PM EDT) -- More law firms will likely follow suit after Baker McKenzie announced both layoffs and pay increases this week, with firms moving away from the pandemic stopgap measure of pay reductions as the year wanes and instead making strategic cuts to areas that are no longer needed, busy or profitable, experts say.

The strategy many law firms took early on in the coronavirus pandemic to preserve capital and avoid dissolution in the midst of an unprecedented and unpredictable situation was to slash pay across the board, from partners to associates to administrative staff.

The move was essentially a way to stop the bleeding of capital as the economy was shuttered amid the spread of the virus, said Michael Blanchard, managing director of Aon PLC's law firm advisory team.

But across-the-board pay cuts are not a good long-term strategy to address the current environment, in which many law firms are seeing some practice areas with a lack of work and others that are busier than ever, Blanchard said.

"The strategy at first was hunker down, build up cash and build up your balance sheet," Blanchard said. "Once more information came in, firms began to get a better idea of the longer-term changes caused by the pandemic, and they are starting to see what those changes have to be and they're acting on it."

Baker McKenzie said Tuesday that it is laying off 6% of its workforce in North America — both lawyers and staff — and plans to reverse pandemic-related pay cuts in the new year.

Davis Wright Tremaine LLP similarly said on Tuesday that it plans to restore its previous pay reductions by half and will lay off some staff. And in July, Bryan Cave Leighton Paisner LLP announced it would roll back previously announced pay cuts by half, while laying off a "very small proportion" of its workforce.

While instituting both pay increases and layoffs at once may seem counterintuitive, it actually makes sense in that law firms are reorganizing and adjusting to the new business environment by directing resources where they will be the most useful going forward, according to Peter Zeughauser, a longtime law firm management consultant at The Zeughauser Group.

For many law firms, the overall financial picture is now generally strong, Zeughauser said, and firms are making cuts in pockets of underproductivity and then putting their resources toward talent in the areas where they see strength.

"A material segment of the market is having better years than they expected they would before this happened. They're going to be proceeding with regular annual pay increases and looking for talent," he said. "And so if firms want to protect their talent, they have to pay market [salaries]."

In addition to layoffs related to some practice areas that have seen a downturn in business due to the economic slowdown, law firms are also adjusting staffing because the pandemic has transformed how they operate and how they view their staffing needs, according to Jill Huse, co-founder of consultancy Society 54.

"With lawyers and staff adapting to their new work-from-home environments, people are becoming more self-sufficient and relying less on support staff," Huse said. "Law firms are looking at the decreased productivity of those professionals who aren't timekeepers to evaluate job necessity. This is a short-term solution that is being dictated by our physical environment, but it could have lasting effects on the structure of our firms as we all learn how to work differently."

Silvia Coulter, co-founding principal of LawVision, also said the way law firms do business is fundamentally shifting as a result of the pandemic.

"It is no longer necessary to be on planes all the time, to be in person all the time, to be practicing inefficiently when technology tools can help redefine the development and delivery methods," Coulter said. "With that change comes the opportunity to review current processes and improve."

The trend of cutting staff positions that attorneys have become less reliant on has been going on for some time, but was accelerated by the pandemic, according to Zeughauser. It is both a cost-cutting effort and a long-term strategic move, he said, and firms seem to view the final months of 2020 as a good time to do it so they can pay out severance packages and start fresh in 2021.

"These firms already know their year this year won't be as good as they'd hoped," Zeughauser said. "The thinking is they might as well take their medicine now since the partners are already expecting a tough year and then achieve the full benefit of the savings next year."

Zeughauser said he expects more layoffs. Often law firm leaders "don't want to be the first," and although there has been a trickle of layoffs already this year, Baker McKenzie's announcement was highly visible and notable due to the size of the firm.

"Firms are all in the mode right now of thinking about it and planning it. The fact that Baker McKenzie did it publicly will cause the people who say, 'Let's not be the first,' to say, 'We can go now.'"

--Editing by Brian Baresch and Alanna Weissman.

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