Legal Times is asking, "What Five Questions Will Law Firms
Face in 2006?" I’d like to suggest there’s really only one
question, and these "five" are each just facets of the same phenomenon.
Their five:
- More merger mania?
- Soaring compensation?
- Billing rates topping out?
- Further cost cutting?
- Client relationships more critical still?
Mergers: Although framed as an across-the-board
issue, the fact is that merger activity is highly focused on firms
establishing, or beefing up, their beach-heads in just two cities: Washington,
DC, and New York. I’ve long been of the view that a Washington
presence (which need not be jumbo-sized) is de rigueur for
a national firm to be taken seriously. We simply live in regulatory
times, and it’s almost irresponsible not to have the ability to join
the legislative/administrative conversation at its primary source.
(No, I don’t own any property on K Street, but I wish I did!)
New York is likewise critical simply because it’s the financial capital
of North America, as well as hub to industries ranging from publishing
and advertising to fashion and—surprise—law itself. But
unlike DC, mere "presence" doesn’t cut it here: Firms
need a critical mass in NYC to make it into the serious consideration
set. What’s "critical mass?" Roughly, north of
125 lawyers.
The biggest challenge is that in both cities, the pickings of merger
targets are getting slim. That’s why I predict we’ll see
more and more smaller-bore mergers where national firms opportunistically
pick up relatively little firms that have an attractive specialty. Just
as an example, Seyfarth Shaw picked
up a Manhattan-centric real estate
firm, Mandel-Resnik (specializing in representing co-op’s and condos)
as of January 1. Total haul? A grand total of seven
partners—but arguably (and IMHO) an excellent fit, as real estate
is a labor-intensive industry and Seyfarth Shaw is definitely a "go-to"
labor law firm.
Look for more of these rifle-not-shotgun targets. But do not
envision "merger mania" as an undifferentiated nationwide phenomenon.
Compensation: Obviously, here are two "compensation"
markets: Partners and associates.
As for associates, I predict we will finally see the pent-up dam burst,
so to speak, and starting salaries will get the first bump-up (+$10,000
seems to be the number people are using) since the (in)famous dot-com-driven
Gunderson-Dettmer pop to $125,000 in 2000.
The partner compensation market is also bifurcated, if you will, into
the equity/non-equity market and the lateral market. In a coincidence,
today we also saw the release of the annual
summary of financial results
for the Top Ten Bay Area firms, and it tells a tale of high (and unsustainable)
rates of growth in the ranks of non-equity partners, and extremely
parsimonious additions to, or even subtractions from, the equity ranks. Just
a sampling:
- Morrison & Foerster shifted 50 partners—15%
of the entire partnership’s ranks—from equity to non-equity. - At Pillsbury-Winthrop, the firm ended 2005 with 10% fewer equity
partners than it began the year, despite absorbing Shaw-Pittman. - Gibson-Dunn, while LA and not Bay Area-based, switched to a tiered
partnership last year. - Wilson-Sonsini is the only firm on the list that remains "single
tier," without non-equity partners.
In other words, non-equity ranks are here to stay, or to grow.
As is activity in the lateral marketplace. Don’t think there’s
a war for talent? Well, there is, and it’s being fought primarily
with the weapon of money. Attractive laterals are not commodities,
and the fight to gain and then retain them only escalated last year.
Billing Rates: Pressure from corporate
clients to cut legal expenses increased last year and will only continue
to rise. So:
"The string of rapidly escalating billing rates has pretty
much run its course,” says Bruce McLean, managing partner at Akin Gump
Strauss Hauer & Feld. “We’re going to have to find different ways to
improve profitability.”
The problem is that just what those "different ways" are is opaque,
at least if firms limit their toolset to fiddling with billing rates.
"Alternative fee arrangements?" Mostly imaginary. Or, as John Beisner,
DC managing partner at O’Melveny, puts it somewhat drily: "There is
a challenge to find ones that are broadly applicable."
In other words, plain old dumb discounting remains the order
of the day.
Was I harsh with that "dumb discounting" jibe? Yes
and no. Yes, I was harsh in that long-term, solid, favored clients
deserve recognition of their status, and the clearest recognition is
a break on fees. Plus, the firm enjoys economies with established
clients in that there’s no new-business-development overhead. But
no, I will stand by it to the extent that just saying, "let me take
10% off—’special for you today!,’" as they say in New York, does
not engender loyalty and in fact invites the question: "If you
can make nice money at 10% off, what sucker would ever pay full freight? [And
the next question is: "How about 20% off?"]
The demise of the billable hour has been foretold so often that we’ve
stopped covering it here; at least until there’s some tectonic change
in the landscape. Suffice to say that imagination and innovation
will ultimately prevail in billing structures. We’ll
know it when we see it.
Costs: Many strategies avail themselves here,
and outsourcing seems to be the favorite son. Far be it from
me to disdain outsourcing—indeed, I’ve often noted that BigLaw
can outsource to the Midwest or the South (internal offices or otherwise)
without needing to skip 12 time zones away—but the issue of quality,
perceived or actual, remains a live one. If I’m a Fortune 500
GC hiring Cravath or Wachtel, do you think "outsourcing" is an option?
I would argue that same (correct and legitimate) mindset applies to
almost any firm in the AmLaw 50, if not the AmLaw 200. The back
office is one thing, but substantive work? First thing you know,
that GC will say to him/herself: "I’m not paying firm X 90¢ on
the dollar to ship their work to Cleveland; I’ll hire another inhouse
person for 30¢ on the dollar." Beware
false economies.
The article makes pregnant reference to another potential source of
"cost savings," to wit practice specialization. The
somewhat ham-handed attempt to make this point gropes at it obliquely
by offering that "par[ing] down practice groups" may be "another option."
What "paring down," a/k/a specialization, means, is simply this: Become
a boutique.
Client Relationships: Aaah, at last the heart
of the matter, and where all of these questions intersect.
Think about it: Mergers are driven by the need to offer a more
complete offering to clients; compensation is driven by the war for
talent, in order to serve clients; new billing initiatives are 110%
driven by clients, not firms; cost-cutting matters only in a world
where clients demand value for money.
As it should, it all comes down to clients.
Which leaves us where?
I suggest, back in the land of virtuous and vicious cycles. Strong
firms will deepen and extend their client relationships by providing
a more compelling array of services from highly talented people priced
to yield a compelling value. Weaker firms will lose cost-conscious
clients as their talent pool dwindles, billing models stagnate, and
practice group offerings ossify.
It’s not five questions, it’s one: How can your firm in 2006
get closer to your clients?
