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Washington-Mergers. Firm dissolutions. Associate salary hikes. Last year was anything but docile in the legal market. With ever increasing competition among firms, 2006 looks to be equally challenging. With that in mind, here are top issues that could be-or should be-in the forefront of every managing partner’s mind heading into the new year. 1. Will “merger mania” across the country continue? Across the country, law firm mergers are changing the legal landscape, as firms seem intent on growing into 1,000-lawyer-plus behemoths to remain globally competitive. In the nation’s capital, the merger wave has taken the form of outsiders snapping up long-time local players. And although Washington has more experience with outside law firms than most cities, the consolidation trend isn’t showing any signs of slowing. In 2005 alone, D.C. saw Pillsbury Winthrop partner with Shaw Pittman, Burns Doane’s remnants head to Pittsburgh-based Buchanan Ingersoll, and Bingham McCutchen announce the acquisition of Swidler Berlin. “There is just more activity than we’ve seen in a long time,” said Michael Rynowecer, president of BTI Consulting Group, which recently released a study on the legal market in 2006. Consultants say that New York remains the choice market, but Washington, because of its importance as a regulatory hub, is increasingly seen as a must-have outpost for firms with national ambitions. 2. Will compensation soar with the ongoing war over talent? Washington’s Crowell & Moring lost its securities regulatory group. Swidler’s energy practice jumped to Atlanta-based Alston & Bird. George Pappas, along with his nearly $10 million in business, gave up on his long-time firm, Venable, for the more white-shoe Washington firm Covington & Burling. The lateral market is hot, and firms are losing some of their best and brightest at the drop of a hat-or a suitcase full of C-notes. “The war for talent is real,” said Ward Bower, a principal at legal consulting firm Altman Weil. “I think, finally, the message is there that the only difference between law firms is people.” For law firms that means the complacency of recent years concerning talent retention is over. Their best weapon: money. So, say consultants, more and more firms are likely to take a long look at how best to reward partners. Some firms may widen the spread between the highest- and lowest-paid partners. Others may finally make the switch to a tiered partnership system, as Gibson, Dunn & Crutcher of Los Angeles did for the first time last year. Partners aren’t the only beneficiaries. For the first time in five years, associates saw base pay for their class rise at firms such as D.C. firms Arnold & Porter and Howrey, and New York’s Skadden, Arps, Slate, Meagher & Flom. But the boosts, which averaged about $10,000 a class, were largely reserved for third-years and above. Specialized firms such as Washington’s Finnegan, Henderson, Farabow, Garrett & Dunner have gone further. The intellectual property powerhouse increased the salary of first-years to $135,000 in 2005. Already, a few other IP firms have followed suit. 3. Have billing rates topped out? Last year, most firms tried to boost profits the usual way: by raising billing rates-on average by about 6%. Mix in some more hours out of your partners and, voil�, you have a healthy jump in profits. But some firm managers say the fee-hiking binge is overdue to end. “The string of rapidly escalating billing rates has pretty much run its course,” said Bruce McLean, managing partner at Akin Gump Strauss Hauer & Feld. “We’re going to have to find different ways to improve profitability.” Although, for the moment, times are good. A recent survey conducted by The National Law Journal [NLJ, 12-12-05] revealed that about 75% of large law firms surveyed in the United States raised their billing rates in 2005. The move toward containing fees is being driven largely by corporate clients, most of whom are under tremendous pressure to close the spigot on legal spending. That pressure is augmented by increased competition from new law firms and from mega-firms gaining a toehold in lucrative practices like intellectual property and securities. 4. Can costs be cut further? Even as some firms continue to raise rates, they are still looking at other ways to hold down costs. One development likely to escalate in the coming year: outsourcing. Firms such as Howrey have already tested the waters for some electronic discovery. And there may be opportunities to capitalize on India’s inexpensive intellectual assets to offshore preliminary work on patent prosecutions. But, said Bower, “There is not a lot of confidence yet in the quality of what is coming out.”

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