This and a Metrocard Will Get You on the Subway

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?"