DOWNSIZING IS OFTEN DANGEROUS

By Jean M. H. Fergus
The National Law Journal, Monday, March 16, 1992

At the risk of going against the current trend, I am now convinced that cost-cutting tactics which center chiefly on "downsizing" - or, for the more cynical, "rightsizing" - are ill-conceived and dangerous for the large law firm. Rather than being the promised panacea for a firm's economic ills, downsizing opens a Pandora's box of troubles that ultimately may affect a firm's very existence.

Of course, relevant economic issues cannot be ignored - loss of a major client, reduced service demand, or increased competition. However, starting in the late 1980's, downsizing became the automatic managerial response to these stresses. The result: wave after wave of layoffs and terminations.

Downsizing is no more and no less than an attempt to lower overhead costs by removing people from the payroll. Of all available cost-cutting options it is the most severe and, for law firms, the most harmful. Unlike the staffs of service industries, law firm staffs consist to a much larger extent of the revenue producers of a firm - its lawyers. Overzealous staff reductions ultimately may affect the very ability of the firm to generate future revenues sufficient to maintain its health and viability.

Frittering Vital Assets
Deeper damage to a firm is more subtle. Downsizing has a negative impact on a firm's capital, which consists primarily of its human assets and its reputation. Not only is the investment in the hiring and training of terminated attorneys prematurely lost, those who remain are left shaken, their confidence and trust in the firm undercut. One has to wonder:

Have these human assets, so sought-after in the mid-80's, lost so much value? Or, is their value not being fairly and wisely adjudged now?

Downsizing results in a decline in loyalty and morale, lower productivity and escalated turnover. Less committed to the firm, associates seek to leverage their training elsewhere. This "brain drain" is already evident in New York as associates trained by large law firms leave to become associates, and sometimes immediate partners, at national firms that are still hiring. Highly skilled and motivated, these lawyers successfully enter into direct competition for the same kind of work that they were doing at their previous firms. Another unwanted effect is the damage to a firm's reputation. Reputation is what draws clients to a firm, inspires a sense of confidence that the work will be done well, and upholds the perceived value of the firm's services. Workforce turnover undermines this confidence. Clients may respond by seeking a more stable service provider. Reputation also draws the best attorneys to a firm - from top law school recruits to lateral associates or partners who are highly trained specialists or have established client relationships. Downsizing sends a message of lessened partnership opportunity to associates. For potential lateral partners, downsizing suggests low productivity, poor management and financial weakness. There are other harmful results. Downsizing reduces a firm's ability to deliver services and hinders flexibility in seeking new clients. And it often masks other internal problems, including poor management and poor planning.

The Bottom Line
But does it help the bottom line? Recent business scholarship suggests that internal savings achieved through downsizing are often only temporary. Old costs grow back: New personnel are hired, and training and reorganizing expenses creep up. And downsizing becomes addictive. According to a recent American Management Association survey, a business that has downsized once is six times more likely to downsize in the future.

Competitive cost control through downsizing does not offer any real advantage, unless a firm is able to achieve a significant cost differential while maintaining the quality of the services offered. The large law firm, competing as a low-cost provider of legal services, may lose more in marketplace positioning than it gains in direct profits. Becoming the Crazy Eddie of the law business - "Our fees are insane" -undermines rather than enhances the real and perceived value of a firm's service. Too often, the temptation is just to pocket these savings, never passing them along to the client.

Advocates of downsizing often fail to appreciate its inherent limitations. Overhead costs are only one side of the equation: economic health is tied more closely to productivity than cost. Firms should focus on generating the type of high quality legal work that can keep its lawyers productive. For only when all lawyers are producing and contributing to a developing revenue base will the firm be truly secure. Law firms need a new way of thinking if they are to meet the challenges necessitated by the current stubborn economy. Firms should be encouraged to evaluate their systems. Costs should be attacked throughout, and innovative ways found to enhance the delivery of legal service while maintaining quality.

For those firms that have not addressed their inefficiencies in these ways, downsizing may be the only choice. But it offers no real solutions to declining profits, loss of competitiveness, or lack of a robust economy. The painful irony is that for those that have embraced the quick fix downsizing seems to offer, the real need to address more fundamental issues may be missed.

Good management starts with making not only tough decisions, but right decisions - those that have the least impact on the underlying capital of the firm. Only when partners start thinking of themselves as owners of a business, individually and collectively responsible for the health of the enterprise, will sound management principles prevail.



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