Hildebrandt and The Law
Firm Group of the Citigroup Private Bank, with help from Baker-Robbins,
are out with
their 2004 year-in-review together with some prognostications for
2005. The New York Times, in its wisdom, headlined
the story, "Partnerships
More Elusive at Law Firms, Survey Shows." That is,
to be sure, one way of looking at it, but to my mind the real story
is one of healthy, even robust, economic growth. Of the 143
firms that reported 2003 and 2004 data:
- revenue was up 9.6%;
- profits per equity partner rose 10.1%;
- rates rose 5.7% and gross hours 3.2%; but
- FTE lawyer headcount rose only 1.5%, the lowest in over a
decade, while - partner headcount rose 2.6% and associate headcount actually
dropped 3.5%, also decade lows (and what, evidently the NYT decided
was the lead).
I don’t know about you, but I bet executives in industries from
automobiles to investment banking would look at those results with
envy. Beneath the raw numbers is where, of course, it gets
interesting. And here, the survey recaps some of the themes
you’ve been reading about on "Adam Smith, Esq." for the past year.
[I] Mergers and consolidation are
here to stay. Activity in 2004 outpaced 2003 and
2005 should see even more segmentation. This is often a
pattern in maturing market sectors. Interestingly, the
survey foresees some potential (unidentified) unravelling of
ill-conceived mergers. I have my list of candidates.
[II] Regional disparities continue. While
the Pacific Northwest, for example, has been weak for the last
few years, Northern California is getting back on its feet and—let’s
hear it for the home team!—"Of particular note during the
past year was the reemergence of New York firms as market leaders." Sticking
with the regional theme, a trend has emerged among mid-size firms
to counter the increasing competition of mega-liths by staking
claim to a regional territory. Understanding that one may
never command the super-premium work is a perfectly rational and
sustainable strategic positioning, assuming the partnership truly
comprehends that reality and is at peace with it.
[III] Globalization is here to stay. US
firms continue to expand in Europe (particularly London), in China,
and, surprisingly or at least "under the radar," in Latin America. The
explosive interest in China is surely one of the past year’s top
stories, with 36 of the NLJ 250 now having at least one office
there (vs. 75 who are in London, the single most popular overseas
beach-head). Whether we can reproduce in China the relative
success we’ve enjoyed in the UK is of course an open question,
but the survey confirms my repeated observation that US firms do
better in the UK than UK firms do here (hindered in the market
for laterals by the predominance of lockstep compensation schemes).
[IV] Corporate clients are starting to push back
on rates. More than a decade after the "DuPont
Legal Model" was invented, clients have figured out they actually
have bargaining power with the AmLaw 100 and are insisting on
deals such as volume discounts, multi-year rate freezes, and
flat fees. Reportedly, the managing partner of "one of
the country’s largest and most respected firms" said he had never
seen such a high level of "hostility" to rates in his 30+ years
of practice. But given the non-negotiable nature of such
mandates as Sarbanes-Oxley, I would venture that while the rate
of increase might slow, the trend-line will continue up and to
the right.
[V] IT grows up. In our post-terror age,
firms are investing in business continuity and disaster recovery
efforts and making sure that they are squeezing the most out of
existing investments and infrastructure. Skadden, for example,
now has three worldwide data centers rather than one at each office.
Often
viewed as part and parcel of "IT," although we know of course
that it’s a cultural beast at heart, Knowledge Management is winning
more adherents as firms recognize it can increase their competitive
distinctiveness and help drive profitability—and firms at
least have the ability to measure profitability at a more granular
level than heretofore, even if they still lack
the courage to actually
do something with that analysis.
What, then, of 2005? A number of fairly non-controversial
predictions are made, with which I largely agree:
- consolidation and segmentation will continue;
- overseas expansion will continue;
- client push-back on rates will take the form of reducing the
number of eligible firms on a company’s "panel;" - outsourcing of the back office will accelerate, as more firms
ask themselves why they should be in the business of providing
support services; and - firm "general counsels" will increasingly be responsible for
the centralized management of conflicts, compliance, and risk
in general.
Finally, here’s a wild card for you: What if the EEOC prevails
in its suit against Sidley-Austin asserting that, because of the
terms of the Sidley partnership agreement, many "partners" were
actually "employees" for purposes of the Age Discrimination in
Employment Act? Back to the partnership agreement with a
clean sheet of paper?
