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Fla. Managing Partners Survey Shows Year of Retrenchment
Daily Business Review
October 29, 2009
Image: Photodisc Green
Sit still at your desk for too long on the 21st floor of Miami's One Biscayne Tower and the lights go off.
That's because Mark Raymond, managing partner of Broad and Cassel's Miami office, persuaded his landlord late last year to install energy-saving light switches.
It wasn't just to help the environment, said Raymond, a trial lawyer.
"You focus in on every place you can save money," he said.
In a sluggish economy, law firm leaders across South Florida slashed expenses this year by cutting attorneys and staff, renegotiating with vendors and eliminating lavish firm dinners and retreats, according to a Daily Business Review survey of 76 area managing partners or other law firm leaders.
Broad and Cassel, which did not cut employees, is on track for a strong financial year, Raymond said.
But not all firms fared as well with woes in the financial sector and corporate America driving down legal business. Firms that relied on real estate and transactional work are the hardest hit.
Taken as a whole, the Daily Business Review's 2009 survey shows a year of retrenchment in the legal industry with law firm leaders striving to regain solid footing in the face of a prolonged economic downturn. Layoffs and pay cuts took effect at firms of all sizes.
In addition to cutbacks, area law firms are monitoring collections, adjusting to the demands of price sensitive clients and refocusing on countercyclical practice areas, according to survey responses and interviews with managing partners.
Bill Brennan, a principal at Altman Weil legal consulting, said he sees law firms beginning to regroup and look for ways to increase revenue.
"Law firms were very effective at reducing expenses," Brennan said. "Now they are saying, 'We've cut to the bone. We can't cut expenses any more. Now we need to look at areas we can grow our revenues.'"
Brennan said 2010 could be a fairly good year. "Firms are much more efficient. They're lean and mean and ready to profit."
TRIMMING THE FAT
Revenue per lawyer dropped or remained flat at 48 percent of firms last year, with large firms hardest hit, according to the survey.
Profits also took a tumble. Just 34 percent of managing partners expect increased partner profits this year compared with 70 percent last year.
In keeping with slack demand for legal services, fewer firms raised billing rates in the past year -- just 54 percent implemented rate hikes in 2009 down from 84 percent last year.
With less money coming in, law firm managers scrambled to cut expenses. Nearly 90 percent of firm leaders said they took steps to reduce costs in the last year.
In addition to reducing its electric bills, Broad and Cassel saved money by leaving some staff positions vacant and limiting travel. The firm's 2009 holiday party will be scaled back to a luncheon, Raymond said.
At other law shops, the cuts went deeper.
Of firms with more than 100 lawyers, 60 percent reported staff layoffs and one-quarter said attorneys had been let go. Another 40 percent of large firms implemented pay cuts, up from just 4 percent in 2008.
Florida-based Holland & Knight did all three. The 1,100-lawyer firm slashed 243 attorney and staff positions early in the year, citing "adverse effects of the current economic downturn." In July, management clipped associate pay an average of 7 percent due to decreased demand for legal services.
"We've certainly focused on controlling our costs, knowing our clients were going to be facing economic hardships," said Kelly-Ann Cartwright, executive partner in charge of the firm's 101-lawyer Miami office.
Holland & Knight's revenue slid 1 percent in 2008 on top of a 0.2 percent drop in 2007. Firm leaders in Miami and Fort Lauderdale said it would be premature to discuss 2009 revenue figures before the firm completed fourth-quarter collections efforts.
"We're poised to have a good year ... given the state of the economy and the pressures put on all law firms," Cartwright said.
Reducing summer associate programs and delaying associate start dates were additional ways firms tried to hem in costs.
Philadelphia-based Morgan Lewis & Bockius eliminated its entire summer associate program for 2010. Last year, the firm brought on 105 law students.
In addition to saving money on salaries, the firm doesn't need many new lawyers right now, Miami managing partner Mark Zelek said.
"People aren't leaving the firm, and work in the industry is down," Zelek said. "The number of associates we have is consistent with work and client needs."
At the 82-lawyer Bilzin Sumberg Baena Price & Axelrod in Miami, five associates who customarily would have started in the fall are slated to begin work in January.
Since 2007, revenue for the firm's large corporate real estate practice has slumped along with the region's market. Rather than closing mega deals, lawyers are focused on helping clients preserve ongoing projects and take advantage of depressed real estate prices through a distressed property fund, managing partner John Sumberg said.
The firm, which laid off a small number of employees this year, has cut back on social and entertainment expenses like dinners and happy hours, Sumberg said. The firm is poised for additional savings under a new 15-year lease in the 1450 Brickell building.
"In good times, you focus more on your top line. In bad times, you tend to focus more on the expense side," Sumberg said. "We have looked very hard at our costs, and we've been able to reduce some things that were nice but not necessary."
One area where the firm won't cut back is pro bono work, said Sumberg, who serves on the board of United Way of Miami-Dade.
"We think a downturn is a time to redouble those efforts because the community is in even greater need," he said.
FLAT IS THE NEW UP
Even Miami franchise law attorney Robert Zarco, a multimillionaire known for his extravagant fashion taste, said he reined in travel and entertainment spending at the 11-lawyer Zarco Einhorn Salkowski & Brito.
"I'm just being a little more cautious," he said. "We used to stay in the absolute nicest hotels. We used to rent the most luxurious vehicles and eat in absolutely the most expensive restaurants."
Zarco's firm handles franchise, licensing, distribution and complex commercial disputes. Since opening in 1990, each year has been more successful financially than the last -- until 2009.
The companies his firm sues on behalf of franchisees can't afford big settlements in the current economic climate, so plaintiffs are taking less, Zarco said.
"If 2009 comes close to 2008, I will be very happy," he said. "We're working hard to make it happen, and I mean really working."
Joseph Altonji, a consultant for Hildebrandt International, said he's been getting that message from a lot of managing partners. "Flat is the new up," he joked.
Meanwhile, some area law firm leaders have resigned themselves to earnings slumps.
Only 37 percent of managing partners reported increased revenue per lawyer in their offices in the past year. However, 70 percent said revenue per lawyer -- a traditional measure of law firm financial performance -- met their expectations.
At firms where business sagged or remained flat, managing partners blamed the economy over any other single cause. The next-ranked culprit was slow-paying and nonpaying clients.
Alan Becker, managing partner of Fort Lauderdale's Becker & Poliakoff, said he expects a roughly 2 percent decrease in firm revenue for 2009 after suffering a 3 percent slide last year. The 125-lawyer firm, recently hit with a $4.9 million malpractice award, held expenses to a 1 percent increase.
"I can't complain at all," Becker said. "Two percent down is not what I would have wanted. On the other hand, it's better than we budgeted."
Becker said the firm has improved lax collections after serious problems in 2008. The firm imposed a 12 percent pay deferral on all attorneys for three months last year to cover shortfalls when legal bills went unpaid.
The firm's receivables now are better than historic norms, Becker said.
"We had such an emphasis on that internally that it hasn't been a problem in 2009," he said. "We require our lawyers to pay close attention."
Across-the-board vigilance to collections is also rule at Fort Lauderdale-based Berger Singerman, said managing partner James Berger.
"Three years ago we had to be vigilant with certain clients," Berger said. "In this cycle, the vigilance has to increase because so many folks are having liquidity issues."
Berger said revenue at Berger Singerman is up for 2009, buoyed by a robust bankruptcy and reorganization practice.
"We've always had a balanced practice between the transactional side and the restructuring side," he said.
Nearly 80 percent of area managing partners said they viewed their firms as adequately diversified in terms of practice areas. Those looking to expand favored adding more litigation and corporate lawyers.
In previous downturns, litigation boomed when the economy soured, helping firms with balanced practices. This recession was different, Hildebrandt's Altonji said.
"Litigation is holding its own, but it's not making up for deficits on the transactional side," he said.
That's partly because clients are reviewing the decision to engage in litigation more carefully and making cautious cost-benefit analyses, lawyers said. One managing partner called it the "wait-to-file phenomenon."
"The days of just diving into a case are over," said Raymond of Broad and Cassel. "Clients aren't ready for $50,000- to $70,000-a-month bills."
Frank Sheppard, managing partner of the Orlando-based Rumberger Kirk & Caldwell, said the 75-lawyer litigation shop has felt the pinch.
Revenue will be flat this year, and partner shares declined, he said. Rather than spending money on a partner retreat this year, the firm held its annual meeting in the 20-lawyer Miami office.
"When our clients suffer, we suffer too," Sheppard said.
PRESSURE ON PRICING
With corporate legal budgets stretched thin, Rumberger Kirk & Caldwell is receiving more requests for discounts or non-hourly billing arrangements, Sheppard said.
"We're open to that," he said. "As a litigation boutique, we can offer efficiencies other firms might not be able to, which gives us a competitive edge."
Two-thirds of managing partners said they received more requests for discounts last year than in previous years. Many reported growing interest from clients in striking alternative pricing arrangements such as flat fee billing.
"Corporate clients are interested in having more certainty when it comes to what their legal spending is going to be," said Cartwright of Holland & Knight.
Price pressure was greatest at firms with more than 25 lawyers, where 80 percent of managing partners said clients have sought discounted fees.
Managing partners at smaller law firms said they have been using the emphasis on pricing to their advantage.
The 12-lawyer Harper Meyer Perez Hagen O'Connor & Albert in Miami saw business grow in 2009, said managing partner George "Rocky" Harper. The firm, which specializes in international and cross-border transactions, can offer better value than a larger firm, he said.
"A firm like ours doesn't have any fat," Harper said. "We don't have a collections department. We don't have a marketing department. We don't have an IT department. That means lower rates for our clients."
The firm's founding partners all previously worked for large law firms in Miami, including Holland & Knight and Squire Sanders & Dempsey.
"Businesses are clearly saying, 'If we can get the same service at lower rates, why not?'" Harper said.
That philosophy persuaded Dan Heller and Glen Waldman to defect from Bilzin Sumberg in March and start their own shop focused on litigation and estate planning. Waldman, the litigator, said clients balked when Bilzin Sumberg raised his hourly rate for 2009 from $475 to $510.
"It was an absolutely terrible decision in this economy and sent absolutely the wrong message," he said.
With just seven lawyers, Heller Waldman can charge more reasonable fees.
"Clients are shopping around, and small firms are appealing," he said.
"It's the lawyer and not the firm that's doing the work anyway," Waldman said. "There's no reason they need to have the trappings of a bigger firm and all the expense."
See the Daily Business Review's full coverage on its Managing Partners Survey: 2009 (requires free registration)
