Just in over the email transom is the following prognostication about
the general health of law firms courtesy of Hildebrandt International:
In our annual report for 2004, we forecasted a strong year for the legal
profession. As we enter the fourth quarter, we reaffirm that projection
as a sampling of our clients indicates that many firms were well ahead
of their budgets at the end of the third quarter.In that sampling of clients, however, it is also clear that the first
quarter upturn in corporate transactions did not continue past early
summer. There was a clear slowdown in demand for M&A transactions
and in IPO volume and the market remains choppy.There is no indication that there will be a change in the decline of
corporate transactions for the remainder of the year. But because of
the strong performance, especially in litigation and financial services
work, this downturn should not have too much of an effect on this year’s
overall performance.Next year might, on the other hand, be a different story especially
considering an increase in demand by clients for discounts and controls
on fees. It is beginning to appear to us that 2004 may be a “spike” year
requiring careful management of partner expectations for 2005.Lastly, we have seen sporadic associate salary increases and rumors
persist of a starting salary increase in New York City. With escalating
demands for discounts and client pressure on legal fees we wonder about
the wisdom of more salary escalation. On the other hand, associate
attrition rates have risen sharply this year sparking concern of associates
looking for alternative careers.We will have more on this in our 2005 forecasts.
Brad Hildebrandt
Astute readers will have observed that I refrain from "micro-" forecasts
such as this. While I’m altogether happy to opine on long-term
market trends and pressures, I believe that in the short term the impact of exogenous events
will almost always trump even reasoned and informed predictions such
as Brad’s.
I report it, therefore, for two reasons: To the extent it summarizes
the landscape of the year to date, it is plainly informative. And
to the extent it foresees a material increase in associate salaries,
I can only view with alarm: Am I the only one to have figured out
that it is only now, five painful years later, that we have absorbed
the 1999 "Gunderson Spike" of associate salaries?
Why am I a hawk against associate salary spikes, having been an associate
myself? I believe them pernicious because of their unintended consequences:
- They raise the pressure for ever-higher billable hours to maintain
profit margins. - They alienate clients, particularly those whose own salaries are
barely or not commensurate, and who do not perceive adequate value
received from first through about third-year’s. - Perhaps most damningly for a firm’s future (can you say, "eating
our seed corn?"), they make it economically onerous to rotate associates
through departments, to give them serious training or mentoring, and
to take professional development seriously.
Were I King, mid-level and senior associates, the most economically
productive to the firm, would receive the outsize salary boosts evidently
being contemplated, while juniors would receive something along the lines
of inflation-adjusted "plus."
Finally, let’s not forget the power of targeted bonuses to reward exceptional
performance—which have, as well, the virtue of being variable not
fixed costs.
So,
if firms are about to inflict on themselves another across-the-board
associate-salary wound, we can only ask, as they do on Saturday
Night Live, "What were you thinking?"
