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For years now, general counsel have insisted they will no longer stomach regular hourly rate increases double the rate of inflation. For the most part, it’s been a relatively empty threat. Though corporate clients are forever scrutinizing their legal bills and demanding write-offs, law firms by and large have routinely gotten away with 6 percent to 8 percent rate hikes, even in a tepid economy. Those days, however, “may be finally coming to an end,” declared a confidential Citigroup Private Bank study of law firm finances, obtained by Legal Times, The Law Tribune‘s Washington, D.C., affiliate. The study found that, while rate increases accounted for two-thirds of law firms’ 2004 revenue gains, they increased at a slower pace than in the prior year, forcing private practice firms to rethink their future growth strategies. By way of proof that corporations are sticking to their guns and taking an unflinching stance against unfettered rate hikes, Fairfield, Conn.-based General Electric Co. is a convincing Exhibit A. In 2003, its General Electric Commercial Finance division did what, for many legal traditionalists, was the unthinkable: it winnowed down its legion of loyal legal vendors by compelling them to submit to an online bidding process, as if they were vying for cleaning contracts or other such low-level work. Firms grudgingly went along but privately stewed. GE’s response to their lawyers’ hurt feelings? In 2004, it implemented the program companywide. In private conversations, general counsel at Fortune 100 outfits readily admit such penny-pinching is quickly set aside in bet-the-company cases. Indeed, the David Boieses and Seth Waxmans at the pinnacle of the legal profession’s upper stratosphere could probably get away with charging $1,000 an hour, some GCs have said. It’s the other 99 percent of private-practice lawyers that have tough choices to make, warned the Citigroup study, which was based on the financial performance of 143 law firms across the country and is considered a top indicator of the state of the legal business. For more-run-of-the-mill work like licensing, trademarks and insurance defense, where specialization and prestige play a lesser role in the outcome, cost-cutting pressures will exact the highest toll, according to the study’s analysis. Barring robust rate increases, law firms have few means at their disposal to maintain revenue and grow profits. They can cut costs and push their lawyers to bill more hours, as they did in 2004, increasing average attorney hours by 1.8 percent to 1,757 hours, the study found. But one can only get so much blood from a stone, and such efforts no doubt clash with associates’ growing desire to balance their professional and personal lives. They can hire more lawyers, though that doesn’t seem to be the path they’re taking. Law firm hiring was at its lowest point in a decade, with head count increasing just 1.5 percent in 2004, according to the Citigroup study. Or they can simply rid themselves of less-lucrative clients and practices — a lop-off-a-limb-to-save-the-body approach that most law firms have been loath to take. Unproductive or less-productive partners beware. The chopping block approaches. Rainmakers, on the other hand, stand the most to gain as firms move to tweak their compensation systems to further reward their top-billers. It’s a never-ending catch-22. Firms that don’t continue to boost profits risk their brightest stars to those that are. And in the name of profitability and greater efficiency, law firm managers will be increasingly under pressure to take drastic steps. Those that do nothing, hoping another tech boom will come along and save them from making agonizing decisions, are in for a rude awakening.

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