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Although many law firm leaders have publicly pooh-poohed predictions that industry profitability would stumble, a recent survey reflects a belief among those leaders that increasing expenses will be cutting into their firms’ bottom lines this year. Lawyers at firms can expect to be pushed for more billable hours while facing a harder struggle to make it into the equity partner ranks. At the same time, the numbers of associates and nonequity partners will rise much faster than any increase in equity slots, according to the law firm leaders. Those results were included in a first-of-its-kind managing partner confidence index � a survey of leaders at Am Law 200 law firms � released earlier this year by Citigroup Private Bank, which serves as banker to 550 law firms, including many of the nation’s largest. Danilo DiPietro, client head of Citigroup’s law firm group, characterizes the prevailing mood among law firm leaders as cautious optimism. The optimism, he says, centers on “demand and revenue growth,” with the caution coming from “concern over expenses.” Am Law 200 firms reported big growth in 2006. But while most respondents predict revenue will continue to climb, they also expect expenses � led by lawyer salaries � to do the same. More than 90 percent who participated in the Citigroup survey said lawyer salaries would be the primary rising cost in 2007 � and that was before the recent round of associate salary raises that brought first-years up to $160,000 in New York and $145,000 most everywhere else. “If we did it today, we would see a more pessimistic view of expenses,” says DiPietro. Non-lawyer staff salaries and real estate costs are also expected to grow at a faster clip than last year, he said. Mounting expenses amid unrelenting pressure to increase profits will heighten competition for equity shares among the ranks of law firm lawyers. “If law firm leaders are worried about profits, they will naturally constrain growth in the ranks of their equity partners,” says Richard Gary, a law firm consultant with Gary Advisors in Tiburon. Thirty-six percent of Citigroup respondents predict a 0 to 3 percent increase in equity partnership ranks while 30 percent foresee growth beyond 3 percent. That leaves more than 30 percent expecting no rise � or even a cut � in the number of equity partners. Yet 65 percent expect more than 3 percent growth in associate headcount, with another 28 percent expecting to see growth of up to 3 percent. So where will all those associates end up? Sixty-three percent of respondents predict a rise in the number of nonequity partners at their firms. “As an industry trend, I think it is correct because a lot of firms are rebalancing their demographics to fit the new world of law practice,” says Ralph Baxter Jr., chairman of Orrick, Herrington & Sutcliffe, whose firm experienced a slight dip in equity partners in 2006. But Baxter says the trend doesn’t mean growth in Orrick’s equity ranks will be constrained in the upcoming year. Gary says narrowing the path to equity partner is a “shortsighted” way of boosting profits per equity partner that won’t help a firm’s overall health. “I think that making it harder to become an equity partner than it has been in the past may actually work to the detriment of some firms because associates coming into these firms looking ahead to the prospect of becoming an equity partner may throw up their hands and say, ‘I’ll never make equity partner. Why should I even try?’” says Gary. Law firm leaders clearly expect to see a lot of trying from their lawyers. More than 80 percent who responded to the Citigroup survey expect their attorneys to bill more hours this year, with more than half of those leaders expecting more than a 3 percent increase. DiPietro says that some firms � but not all � are already extracting as much work as they can expect from their lawyers. “I see there are a considerable amount of firms that can move their productivity up,” he says. Some firms are controlling expenses, which allows them to shore up profitability, by shipping some of their back-office functions to less-expensive locations. Baker & McKenzie now houses some IT, word processing and clerical staffers in the Philippines. Orrick, for its part, consolidated its day-to-day administrative operations in West Virginia five years ago. “Orrick has saved a considerable amount of money because of it,” says DiPietro. The profit-focused respondents in Citigroup survey seem less interested in embarking on mergers, with only a quarter of them saying they planned to explore a merger or acquisition this year. “I think it’s partly seeing how difficult it is to pull off a merger � especially a merger of equals,” says DiPietro. But Baxter � a veteran of successful and failed merger adventures involving Orrick � doubted that firms are scared of merging. “I think we will continue to see mergers and acquisitions of law firms for the foreseeable future,” he says. “The consolidation will continue, the largest firms will continue to grow and being middle-sized will be ever more challenging.” Zusha Elinson, a staff writer at The Recorder in San Francisco, covers the business of law firms.

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