Upping the Ante

By Aric Press
The American Lawyer
December 1, 2004


Leaders of Am Law 200 law firms are a very confident bunch. Fully 88 percent, in response to our annual Law Firm Leaders Survey, reported that they were optimistic about their firm's prospects for next year. As Dizzy Dean, the star pitcher for St. Louis Cardinal teams that used to win World Series games, liked to say: "It ain't bragging if you can do it." After staggering out of the wreckage of the tech bust and post-9/11 trough, it's quite clear that they can. According to our Am Law 200 reports and the Citigroup studies of firm finances, these firms are into their fourth year of annual revenue growth exceeding 6 percent. In the language of the latest pop culture craze, they've drawn inside straights even as they kept raising the ante.

Over the next 12 pages, we present a special report on the outlook for 2005. It includes the results of our Leaders Survey, stories about three top-of-the-mind topics-client relations, hiring, and billing plans-and a report from Citigroup's Danilo DiPietro on his bank's projections for this year and next. And it raises the question of whether the firms can continue successfully to play their hot hands.

We conducted the Leaders Survey in October, asking the heads of The Am Law 200 to complete a confidential online questionnaire. We received responses from 128 firms. The top-line responses include:

•• Hourly rates are headed up: Forty-four percent planned hikes of more than 5 percent; 45 percent planned hikes of 5 percent or less.

•• Seventy-three percent predicted that profits per partner would grow by more than 5 percent in 2005.

•• As was the case last year, litigation was the practice area that a plurality of respondents thought would grow the most: Forty-nine percent said their largest revenue growth would be in litigation, and 56 percent their biggest head count growth would be there. Corporate work placed second, both in revenue (33 percent) and head count (27 percent).

•• Hiring plans were mixed. Fifty-four percent planned bigger first-year classes than last year; 41 percent plan to hold them flat.

•• About two-thirds said they plan to open a new office or sharply expand an existing one. Of that group, about one-third eyed New York; 22 percent were looking abroad.

•• Twenty-six percent-about the same proportion as last year-reported that they are seeking a merger partner.
Will the winning streak hold? The only potential jokers in the deck are the ones who have long been there-the clients. And there is a good deal of contradictory evidence about their behavior and intentions. The vast majority of firms plan to raise rates this year-most at a pace that again exceeds inflation. And why not? Firms have successfully passed along their increased costs plus a handsome profit for years; that fact, more than any other, explains their remarkable run-up during an otherwise troubled economy. During this period, there has been increased discussion of client push-back, but the evidence of real revolt is spotty. For instance, 43 percent of our respondents reported no change in client behavior regarding collections in 2004-that is, clients paid their bills. An even greater number-roughly two-thirds of respondents-said that clients had demanded more discounts this year. Clearly there is ferment, but clients are talking more than walking. Last month Corporate Counsel, our sibling monthly, published its annual review of which firms represent the Fortune 250. The report is notable for the lack of turnover. (For results, see corpcounsel.com.)

If a client rebellion were brewing, it's not obvious that the firm leaders would be among the first to know. More than half-52 percent-reported that over the last year they had met with five or fewer of their firm's top 20 clients to discuss the firm's performance. An additional 6 percent said they'd met with none. This is a stunning result, given that the conventional wisdom in corporate America, which is to say clients, holds that CEOs are expected to visit with their major customers. That formulation assumes that the primary relationship is between the company and the customer. That's still not the case in many firms, where partners jealously guard their client relationships and compensation systems reward hoarding, not sharing. Both of those traditions fly in the face of the elaborate and expensive efforts that firms have made to become more corporate, more businesslike, more institutional. In short, firms are trying to have it both ways. A firm leader who needs permission from a partner to visit a major firm client may be many things, but a business leader isn't one of them.

This year we asked some benchmarking questions about how firm leaders spend their time and who helps them. We found that, on average, running firms is becoming a full-time job. The leaders reported that they spend two-thirds of their time on firm management issues, roughly another fifth on business development, and the rest on maintaining their practices. For help, they turn to professional staff rather than their partners. At 91 percent of the firms, only five or fewer lawyers spend more than half their time on firm management.

Instead, a so-called C-level administrative staff has developed. Most responding firms now employ chief operating, financial, and marketing officers, and 55 percent have a general counsel. These administrative staffers don't all have the same status, a tricky problem at firms that are famously conscious of both pedigrees and prerogatives. Forty-three percent of the COOs and 14 percent of the CFOs serve on firm executive committees. The others get to wait at the foot of Sinai.

None of this should suggest that firm leaders' jobs are easy. They're good jobs-off-the-clock, roaming free safeties who are paid to emphasize the vision thing. But they're full of traps, as evidenced by the carcasses of failed or no-longer-independent firms that dot the landscape. We asked the leaders to state their biggest challenge. The litany was familiar but no less daunting: Manage growth, integrate laterals, expand key practice areas, anticipate client needs, find new business that can pay their rates, expand aggressively while vigorously maintaining firm culture.

And still they're optimistic. Whether like Dizzy Dean they make it into the Hall of Fame remains to be seen.

Good Times Ahead?

Eighty-eight percent of respondents to our firm leaders survey said they are optimistic about their firm's prospects for 2005, while 12 percent said they are uncertain. Nearly three-quarters predicted that profits will increase by more than 5 percent, and half said they plan no increase in capital contributions.

Growth in profits per partner:

Grow by more than 5%: 73%

Grow by 5% or less: 24%

Remain flat: 2%

Decrease: 1%

Increase in capital contributions:

None: 50%

Less than 5%: 28%

By 5 to 10%: 17%

More than 10%: 5%

Too Many Chiefs

As firms evolve into businesses, C-level nonlegal employees are here to stay. More than eight in ten respondents to our firm leaders survey said their firms employ a chief operating officer. Even more said they have a chief financial officer.

Which do you employ?

COO: 84%

CFO: 93%

CMO: 80%

GC: 55%

Which chief administrators serve on the firm's executive committee?

None: 46%

COO: 43%

CFO: 14%

CMO: 4%

GC: 13%

Which of the chief administrators report directly to you?

All: 22%

None: 5%

COO: 68%

CFO: 24%

CMO: 17%

GC: 31%

What will the COO earn in 2004?

More than $1 million: 3%

$800,000 to $1 million: 5%

$600,000 to $800,000: 8%

$400,000 to $600,000: 29%

$250,000 to $400,000: 33%

Less than $250,000: 7%

Declined to answer: 14%