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Over the last several decades, some American law firms, anxious to better serve global clients, have expanded rapidly into foreign markets. Opening up scores of satellite offices in many countries, these law firms have concentrated on creating a strong global presence. But going global has not paid off for all of these firms. Maintaining a large global infrastructure has created significant expenses and eroded margins. In contrast, firms that have selectively expanded overseas, opening up only a few satellite offices in key locales, have consistently outperformed their more global and domestic counterparts. According to research conducted by the Law Firm Group at the Citigroup Private Bank, firms with a focused overseas presence are more profitable than those with either a significant or very small overseas footprint. The Law Firm Group analyzed four years of data for 39 firms from 1998 through 2001. We looked at six global law firms, 15 selectively global firms, and 18 domestic firms. Overall, the global firms have the most attorneys and the most foreign offices — but the same number of U.S. offices as the selectively global firms have. Global firms also have a significantly higher ratio of salaried attorneys (associates, income partners, and of counsel) to equity partners than firms in either of the other two categories. In 2001, the global firms had an average of 1,221 attorneys, with half of them based outside the United States. With an average of 30 offices, the global law firms had 23 offices abroad. The selectively global firms had an average of 893 attorneys and 13 offices, with only six offices and 11 percent of their attorneys overseas. Meanwhile, the domestic law firms averaged 779 attorneys in 12 offices, with about 2 percent of their attorneys divided between two international offices. Of the U.S. law firms surveyed, the selectively global firms performed the best in all three components of revenue that we examined: productivity, rate, and realization. Meanwhile, global law firms performed the worst in most of these categories. Our conclusion is that firms that have staked out a global niche concentrating on a few key international locales have a significant advantage over firms with either a very large or very small global presence. The higher revenue indicators of selectively global firms may be attributed in part to not having an extensive international infrastructure to set up and support. During the time period we studied, infrastructure costs — particularly technology and real estate buildouts — were rising faster than other nonpersonnel costs. PRODUCTIVITY Even though global firms have a higher number of salaried attorneys per equity partner than both selectively global and domestic firms, both partners and associates of global law firms consistently billed the lowest number of hours of the three groups. Thus, not only did the global firms have the greatest expenses of all the firms surveyed, they also were the least productive. For example, in 2001 the average hours per partner were 1,819 at selectively global law firms, 1,748 at domestic law firms, and 1,614 at global firms. Partners at global firms did not fare any better in other years surveyed. In 1999, partners at selectively global firms billed 1,911 hours, compared with 1,821 hours at domestic firms and 1,650 hours at global firms. Associates at global firms also lagged behind. In 2001, the average number of hours billed per associate was 1,555, compared with 1,794 hours at selectively global firms and 1,764 hours at domestic firms. Even in 1999, during the economic boom, associates at selectively global firms billed 311 hours more than their counterparts at global firms: 1,931 hours vs. 1,620 hours. BILLING RATES Another reason why global firms are trailing is that their billing rates are lower. In particular, among associate billing rates, selectively global firms have a significant advantage. (We did not look at the actual billing rate but at a blended billing rate, or the dollar value of total hours billed divided by billable hours.) Although the rate in 2001 was roughly $500 among partners in both the global and selectively global firms, it varied greatly among associates. For instance, in 2001 the blended billing rate for associates at selectively global firms was $301, while at domestic firms it was $248, and at global firms, $246. Many factors, such as attorney demographics, can affect this billing rate calculation. Nonetheless, firms that have the highest number of salaried attorneys per partner yet the lowest associate billing rates will, at the end of the year, have incurred higher expenses and collected less revenue. REALIZATION Global law firms are also lagging behind the other firms in the amount of fees they are actually able to realize. Selectively global firms have consistently outperformed global and domestic firms in converting a higher percentage of their hours worked to cash. In 2001, the realization rate for selectively global firms was 93 percent, while the rate for domestic firms was 92 percent and the global firms trailed behind at 90 percent. The discrepancy was even starker in 2000. The rate for global firms was about the same as in 2001, but the selectively global firms realized more than 97 percent. Fewer hours logged, lower billing rates, and lower realization all contributed to diminished profitability. Selectively global firms were more profitable than both global and domestic law firms, significantly outperforming their counterparts in both net income margin and net income per partner. NET INCOME MARGIN In all four years surveyed, selectively global law firms had a higher net income margin than their global and domestic counterparts. By not laying down an extensive foreign network, these firms were able to keep their cost structure leaner. In 2001, selectively global law firms had a higher net income margin of 38 percent, as opposed to 31 percent for domestic firms and 30 percent for global firms. In 1999, the gap was even wider. Selectively global firms outperformed global firms by 8.5 percent, with a net income margin of 42 percent vs. 33 percent. Selectively global firms also had the highest net income per partner, outperforming global law firms by $264,000 in 2001, generating a net income per partner of $920,000. That year, domestic law firms had the lowest net income per equity partner: $601,000. And in the three prior years, selectively global law firms were consistently more profitable than both global and domestic firms. Large infrastructures are costly to maintain. For global firms, infrastructures so far have been a drag on earnings. According to the findings of the Law Firm Group, U.S. law firms can serve global clients profitably and effectively without having an extensive international network of offices. Danilo S. DiPietro is business head of the Citigroup Private Bank’s Law Firm Group, which provides financial services to more than 550 law firms and 35,000 attorneys in the United States and London. The Law Firm Group surveys firms in the AmLaw 100 and AmLaw 200 to provide a snapshot of trends and the future direction of the legal industry.

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