2004 in Review and a Wild Card for 2005

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?