Citigroup's DiPietro and a distinguished panel at the Law Firm Leaders Forum said the current business model is broken
Zusha Elinson
The Recorder
March 9, 2007
Will the good times cease to roll for leading law firms?
With some gloom -- though not so much doom -- industry observers forecasted a cooling of the legal market over the next five years at the Law Firm Leaders Forum, held Thursday and continuing today in San Francisco. Ever-increasing pressure on rates from clients, rising costs, including the recent hike in associate salaries, and segmentation of the marketplace will make it hard for firms to maintain robust growth -- especially of their bottom lines, they said.
"There are a lot of red flags waving right now," said Bradford Hildebrandt, a law firm consultant with Hildebrandt International. "I would be starting to plan for an economic correction."
He led the morning's first panel, "Legal Marketplace 2012," with the forum's co-chairman, Orrick, Herrington & Sutcliffe Chairman Ralph Baxter Jr.; Danilo DiPietro, client head of Citigroup's law firm group; and Aric Press, editor in chief of The American Lawyer, a Recorder sister publication and affiliate of Law.com.
While the tone of that first panel was fairly downbeat, the legal titans in attendance said the outlook isn't so bad. At the next panel, the head of Latham & Watkins disagreed with the dire predictions.
"I thought the first panel was remarkably pessimistic," said Chairman Robert Dell. "In terms of expectation, if any of us look back 10 years and ask ourselves, in our rosiest predictions, what kind of growth we'd see, it would be far lower -- I'd venture to say half of what it's been."
The industry has had a strong track record in recent years. According to a survey of 153 law firms by Citigroup -- a banker to many firms and a participant in this week's forum -- annual growth rates for revenue and profits per equity partner for the last five years averaged 9.8 percent and 10.6 percent, respectively.
But projections for 2007, from Citigroup and Hildebrandt International, peg revenue growth slightly off pace and profitability down to 7 to 9 percent.
"I really believe the business model is tired and old and not working for a lot of firms," DiPietro said. Citigroup and Hildebrandt International say 6 to 8 percent rate increases across the board contributed much to recent profitability, and DiPietro said increasing pressure from clients and competition could make it difficult to keep raising rates.
Evoking Nietzsche's oft-quoted proclamation about God in the modern age, DePietro declared, "The billable hour is dead." He pointed to fixed-fee arrangements, like the one that technology giant Cisco Systems Inc. has with some of its law firms, as a possible wave of the future.
Although firm leaders in attendance conceded that they are seeing more sophisticated buyers, RFPs and "beauty contests," they said that overall demand is high, especially for high-end work.
"It's hard to say the model is broken when demand is so high," Dell said later at his panel on the "multifaceted legal market."
On the same panel, Dechert Chairman Barton Winokur said his firm looks for ways to try to meet clients' desire for lower rates not by eschewing the billable hour, but by being more efficient with time. Clients, he said, are willing to swallow rate hikes if they see firms making an effort to use their time better.
Firm leaders said there are many other ways to keep profitability from sinking. Just last week, Chicago's Mayer, Brown, Rowe & Maw announced that it was de-equitizing 45 partners, a move that will help push PPP up at the firm. "I think there's a need to constantly work on the structure to make it as profitable as it should be," James Holzhauer, Mayer Brown's incoming chairman, explained during a break Thursday.
Other large firms have restructured partnership in recent years to improve the bottom line, but consultant Hildebrandt -- an admitted advocate of the two-tiered partnership -- said the ultimate cost of reining in equity can be high.
"I think de-equitization is going to do more damage to morale than anything in the next five years," Hildebrandt said. "Statistically, that group performs less than they did before."
Among the mounting costs at firms are associate salaries, which recently jumped significantly. At most leading firms, first-year salaries hit $145,000 around the country and $160,000 in New York. Baxter said these types of expenses could really cost firms if they want to compete for high-end work but can't get it in the ever more segmented marketplace.
"The firms that don't have clarity are going to have expenses to the high end and revenues to the middle," he told the audience.
Taken from http://www.law.com/jsp/article.jsp?id=1173363842796&rss=newswire
