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These are stormy times for law firm leaders. The deal market is flat, the proposed Microsoft-Yahoo merger notwithstanding. Credit is tight. And there are fewer big cases to go around. In fact, recent surveys of top firm partners, including one by our sibling publication The American Lawyer , have shown a gloomier-than-usual outlook among law firm leaders about the coming year. Among the findings of the Am Law Firm Leaders Survey, released in December: For the first time since the magazine began conducting the survey in 2003, a substantial number of firm leaders reported uneasiness about the future. A healthy percentage expected a decrease in revenue for 2008, corporate practices were expected to be flat to down, and even litigation wasn’t expected to be the bulwark it has been for firms during other economic downturns. To find out how Washington’s law firm leaders feel about the current state of affairs, Legal Times invited five of them to a Jan. 29 breakfast panel discussion, titled “The 2008 Legal Business Forecast.” The guests included: Maureen Dwyer, D.C. managing partner for Pillsbury Winthrop Shaw Pittman; Richard Murphy, D.C. partner in charge for Sutherland Asbill & Brennan; Michael Nannes, chairman, Dickstein Shapiro; La Fonte Nesbitt, executive partner in the D.C. office of Holland & Knight; and Robert Ruyak, chairman of Howrey. David Brown, editor in chief of Legal Times , moderated the discussion. The verdict from the panel: They acknowledged that the economic weather is stormy and that law firms are facing more pressing challenges when it comes to winning work from clients, paying partners and associates, and differentiating themselves from each other. That said, they saw bright spots for firms that are creative � even in practice areas like real estate, which have been hit hard by the subprime mortgage mess. What follows are excerpts from the conversation, edited for length and clarity. THE STATE OF THE MARKET BROWN: Let’s start by discussing where you think the D.C. market is. How bad is it out there? What are the challenges, and what are the potential bright spots? RUYAK: I have to, of course, look at this from a particular point of view, since we are virtually 100 percent litigation. What I can tell you is year over year, our litigation has been up around 15 percent. That is 2007 over 2006, most of that coming the last four months of the year. So what we are actually seeing is an increase in the overall litigation demand. Now, in truth, what we are also seeing is that the cases are larger and fewer. I think over time, what is likely to occur here, I think, is that the number of filings in courts may be down, but the cases tend to be larger. The other phenomena, I think, is � and I think this is something that we all have to look at � that major corporations now are consolidating their hiring. This shouldn’t be a surprise to us, because they have been doing that for years on the transaction side of practice. Most major corporations now are reducing the number of firms they use for litigation…. What that means probably is that firms have to be serious about their litigation practices if they want to keep them. We have to have greater depth. We have to have greater expertise in those areas. We have to convince clients that we have to be one of a small number of firms doing their litigation rather than a large number. I think we have all heard this. There are a lot of corporations using 40 firms, and they are trying to get down to six or eight or 10. I think that is really a trend. NESBITT: I think on the appropriations and legislative front we obviously have an election coming up. … Chances are fairly good that there are going to be some changes out of that. That typically opens up opportunities on the regulatory and legislative side, because people are wondering who is now in control, how the focus is going to be different. The other thing that happens, I think, is you get turbulence in the economy. People start to look to the federal government for money in ways that they didn’t look to before. So, I think you will see some opportunities there as well. There are obviously a lot of investigations that are going on, both on the Hill and elsewhere. I think � especially if you see a Democrat in the White House � there will be almost an irresistible urge on the part of the Democrats to step up investigations even more � aimed at companies or aimed at entities that they perceive as favored by the Republicans. So there, I think, for people who have compliance practices, investigations practices, practices defending people on those kinds of areas, you will also see something of an up turn. NANNES: I’d like to address it a bit from the macro side. I’m sure most people here have read the materials in The Wall Street Journal and from Dan DiPietro at Citi[group Private Bank] over the last few weeks comparing the situation in years past and today. The year they seem to most want to compare it to is 2001, when you came out of a world of substantial salary increases that preceded heavy hiring, followed by an external economic event which folks all thought never would happen: the crash in certain markets associated with the tech boom in 2001 and subprime now. In both instances, everyone was wondering “where is it going to go?” … I think what you have to do is continue your strategic focus. I do think that 2008 is going to see more segmentation in the market than we have seen over the last couple of years. In New York, the rich continue to get richer. In some other places, you have seen some separation. I think this is a very big challenge for Washington firms in particular. MURPHY: The thing that probably strikes me more than anything as we move into this recession, which is probably the 15th of my career, is how much everything is accelerating. It’s like it changes every day. We are not going to have a lot of time in restructuring practice [where Murphy practices] to savor this recession, I don’t think. Right now, I would say transactional practice is likely to be flat to down. I think that is true for the first half of the year, but if the Fed keeps cutting rates, the second half of the year may be good in the transactional business. So, I’m not terribly pessimistic about that…. Every time we have a downturn, I have seen litigation pick up. But like Bob [Ruyak], I’m very much aware of the fact that the clients we all want to have are consolidating their services in litigation � just as they have done in the transactional practices in the past. The real effort for a lot of us this year is to make sure we are on that list of four firms that a client uses as litigators rather than where you might have been before, where you were on the list of eight or 10. DWYER: In my particular area, real estate, everyone is talking about the huge impact [the economic downturn and subprime mess] is going to have on the practice. On a national level, I don’t see it having as great an impact as people are fearing, because I think it creates opportunities for those developers, for those clients with money to go in and take advantage of opportunities. There are pension funds, there are insurance companies that have money and are looking at this as a real opportunity. The real advantage of being in D.C. is what every real estate lawyer here knows, location, location, location. D.C. may not be recession-proof, but we certainly have a lot that will allow us to survive even a shake-up in the larger economy. We talk a lot about having the federal government here and what they can do to the economy. That is not just in terms of creating jobs, but attracting companies that are bringing jobs. The other thing the federal government does is operate as a real estate developer. The whole Anacostia waterfront, those 44 acres were developed through a partnership by [the General Services Administration] and a private developer. You are creating this mixed-use community. The other large private employer in Washington � the largest, in fact � are the institutions of higher education and the medical centers. They have access to capital. They have a need to go forward, and the educational institutions alone pump over $5 billion into this economy. So, we have a lot in Washington, I think, to sustain us and keep us strong.
• Maureen Dwyer has been the managing partner of Pillsbury Winthrop Shaw Pittman’s D.C. office since 2005 and is a real estate lawyer who focuses her practice on zoning and municipal law. • Richard Murphy, the partner in charge at Sutherland Asbill & Brennan’s D.C. office since July 2007, is the senior litigator in the firm’s business restructuring and bankruptcy group. • Michael Nannes was named chairman of D.C.-based Dickstein Shapiro in 2006. He has served in management at the firm since the mid-1990s, including as deputy managing partner and managing partner. • La Fonte Nesbitt is executive partner for the D.C., Northern Virginia, and Maryland offices of Holland & Knight. A real estate lawyer, Nesbitt co-chairs the firm’s Military Installations Redevelopment team. • Robert Ruyak has been managing partner, CEO and chairman of D.C.-based Howrey since January 2000. Ruyak is a litigator who has tried antitrust, intellectual property, and insurance coverage cases.

STANDING OUT IN THE CROWD BROWN: Right now, I think there are 25 Am Law 200 firms with more than a thousand lawyers, and 85 or so with more than 500. How are clients going to pick from that group of firms and really differentiate law firms from each other? How does that work? How are you going out to clients and telling them: “Well, we’re different. Pick us; make us one of the six firms you select for your list”? MURPHY: You have to pick your spot, because no 500 � and this is hard for me to believe � but no 500-lawyer firm can do everything. What we have done at Sutherland is sort of on the old GE model: We want to be in the areas where we can either be at the very top of the practice nationally or where we can aspire, logically, to be there. Like, for example, we are always going to be heavily focused on tax, because that is the very core of the history of the firm…. We have always been in Washington doing tax. We will always be focused on tax. As we move on, we will be looking to other areas where we can be one of the go-to firms. We can’t be in everything. So, we are going to be in things like tax. We are going to be in things like the insurance products that we do. We are going to be in things like certain areas of the energy practice. There are a lot of areas we are not going to be in, because we can’t be at the top. I think that’s how you deal when you are below that top 25. You focus on what you can do best; create industry teams. BROWN: La Fonte, your firm is actually in that list of 25 firms with more than 1,000 lawyers. How is Holland & Knight working to differentiate? NESBITT: Well, I guess I agree that � and I wouldn’t have thought I’d ever say this � I’m not sure you could do everything with a thousand lawyers either or 3,000 lawyers. As everybody in this room knows, the legal needs of clients are incredibly complicated and getting more so all the time. The other issue that you obviously get to with even 500 lawyers or a thousand or 3,000 or 5,000 is that your conflicts are unbelievable. I mean, I think about when I open a matter for a client, if I only have to clear one conflict, it’s an easy one. It is not unusual to clear two or three, particularly when you have � as a real estate lawyer � a practice and firm that has to practice not just locally, but nationally. NANNES: In the context of getting client attention, one thing that we have noticed over the last few years is � and we emphasize this for our partners � is that the old rules don’t apply. I mean that in the sense that, if you are invited to visit a client, you cannot just sit there and tell them what to do…. It’s got to flip. It’s got to be the reverse. You need to determine what are your clients’ needs and then how can we satisfy them. So for all the RFPs that we all spend our time responding to, we have to determine the client’s business needs. If you can get there as a strategic business partner rather than just as a lawyer, you have a chance of getting closer to the wheelhouse of that company and being a partner that they turn to on a regular basis � rather than just on a matter-driven basis. DO PARTNERS GET IT? BROWN: Do you find that partners are responding to these kinds of changes � that they are getting it? Are you spending a lot of time trying to talk to them about how to sort of change the way they pitch to clients, and how they differentiate the firm from others? RUYAK: You have to. I’ll tell you: The supermarket is gone; forget it. The supermarket law firm is not going to exist in the future, even among the largest firms. It has returned to two things, specialization and customization. General counsels’ offices are no longer lifetime positions. One bad mistake, and they are gone. No general counsel is going to exist if he hires the wrong firm. So what is the wrong firm: A firm that lacks experience, depth, and track record. I think for all of us, regardless of our practices, what is important is that we have to become specialist, and I think, as someone said, we have to be in the top five in a practice area. That is what we have to aim for. The other side, though, is customization…. When you go to a client, the client wants to hear how you’re going to address their needs, how you’re going to adjust the law firm to their needs. Interesting � and I will predict this, because I’m seeing it happen a little bit: If a client has a preferred provider program, they pick four firms. They are going to start dictating to those law firms the people they want working [on their matters]. I’ve actually had some preferred providers come to me and say, “that lawyer is a really good lawyer in that firm. The firm didn’t make the cut. But I want [that lawyer]; you need to get them.” That’s a whole different mentality for law firms. DWYER: If you get to the point where you are one of the four firms that a client is using, they are looking to you to do really innovative, high-end work. You develop such a good relationship with the client. You become so creative in the way you approach their need that it becomes much more challenging and exciting work, than just doing the run of the mill, generic, sort of commodity-type work. So, there are rewards that are convincing our partners that this is the way to go. THE DANGERS OF CUSTOMIZATION BROWN: Is there a danger here, though? This has happened: Firms had a very specific list of institutional clients. They had all of their eggs in just a few baskets, so to speak. If we are returning to that model, is that a danger? If you lose that client, that could be a big problem for the firm. Do any of you see that as a concern? RUYAK: I think it is always a concern, but I think in the modern relationships the change is that they are more mutual. For example, I think in the last three or four years, we have signed, I’d say, 10 to 12 contracts for preferred provider relationships that are three- to four-year deals. So clients are demanding, but they are also giving. It gives you an opportunity to build a relationship to last a very long time. Now, mergers and acquisitions, of course, are our current risk. Somebody [a client] could disappear tomorrow. Even under those arrangements, though, the tendency is that you have a lot more staying power with that client. The other side of this is that it’s very hard for a client to get rid of us after a while. If we are doing $20 million worth of litigation, that stuff is long term; it’s ongoing. We also now understand their business. We create relationships not just with the legal department, but with the business people who are behind those issues and problems. NANNES: Most of us who are out there buying our malpractice insurance know that carriers do not like seeing firms that have more than 5 percent of revenue tied up in one client � when it gets closer to 10 percent, they will really pay attention. So, there is a concern on concentration. PROFITS RISE, BUT HOW? BROWN: One of the interesting stats from The American Lawyer‘s recent Law Firm Leaders survey is that some 92 percent of the respondents said they expected an increase in profits per partner, and a solid majority said that increase would be more than 5 percent. Given the economic factors out there right now, how is that possible? Are firms going to be shaving practice areas that maybe don’t do quite as well to get those numbers? Anyone want to jump in on that one? RUYAK: You have to create efficiency and you have to raise profitability. The way you do that is to lean toward more-profitable practices. You have hit on one of the very principal issues for firms…. I think for firms, yes, there will be a shedding of unprofitable practice groups. Also, I think we have to be constantly looking for ways to reduce our costs. We cannot be, as maybe we did 10 or 15 years ago, continually increasing our rates simply on the basis of our cost structure. I think rate increases are now based on profitability, which means we have to control the cost structure. That is one of the reasons firms are getting larger. Larger firms are going to have a lower overall cost structure, if they are run properly. DWYER: I think all of us are learning to run ourselves more like businesses. We have learned to become more efficient. We have learned how to handle the ratio of staff to partners. We have learned to cut costs where we can. I think also within our practices, we have learned how to manage the teams and put together the people working on a case so that we create efficiencies. Our rates are going to go up. But I think our experience with clients is there is not as much a concern about the hourly rate, as there is a concern about the total cost to them at the end of the day and what value are we giving to them. If we can add value, whether it is a litigation matter, or a real estate matter, or whatever matter we are working on, the client is much less concerned about the cost. And we are focusing on those opportunities where we can really add high value, rather than the run-of-the-mill, more commodities-type work. BROWN: Is that so, Rick? Are the clients willing to pay those rates, rate increases? MURPHY: It depends on the client. The rational way for a client to look at it is what does it cost at the end of the day: Were you the most efficient provider? But I have to tell you, we do have clients who are focused on only getting the 10 percent discount off of some magic rate, which is insane, frankly. But we have a lot of clients who do that, because that’s the guideline they have. We want you to get 10 percent off the standard rates no matter what the standard rates are. NANNES: I think, back to the question about profits per partner and profitability, we are all congratulating ourselves about how we are running law firms more like businesses. That is clearly true. Things have changed a lot in the last 15 or 20 years, but we still have a long way to go as an industry in terms of really running things like a business, being willing to make tough decisions, being willing to really block and tackle when it comes to expense control. There is still cost to be wrung out of the system for all of the big law firms. SAVING MONEY BROWN: Can you be specific? What are some of the costs that you think are out there? NESBITT: I think that one way in which we can all become more efficient is to finally succumb to the fact that the computer has changed the way in which our clients do business and, therefore, changed the way we do business. There are staffing patterns that we all have, and the information you get is how many lawyers per secretary. The higher the ratio, presumably, the more efficient you are. What firms haven’t really done, though, is talk to the accounting firms. You go talk to some other businesses, and their ratio of principals to staff make ours look pathetic. That’s because we have an old model that says, “a secretary does these types of functions for two lawyers or three lawyers.” Instead we should be saying, “You know what, let’s go back and revisit that.” Maybe you could have staffing patterns with one administrative support person for eight lawyers…. I think there are some staff costs that can be saved, and it’s not simply lopping off secretaries. It’s revisiting the sort of basic administrative staff of our firm to see whether there are efficiencies that can be created. I think there are probably some potential revenue sources in there; that we don’t bill for things that maybe we could bill for if we were staffed appropriately…. As to whether clients willingly pay higher rates, I can’t imagine anybody willingly paying higher rates any more than anybody willingly pays higher taxes. I think that clients are willing to do it, even if it is holding their noses, if you convince them that we are, in fact, providing something that other firms can’t…. Against that, you obviously have statements by lots of general counsel � Susan Hackett is the general counsel of the Association of Corporate Counsel. She has been quoted a couple of times that clients are livid about increases, if they perceive that those raises are simply a way of continuing to pay for an increase in associate salaries, for example, and to keep partner compensation the same. If they are convinced that the billing rate increases actually have some validity behind them, that you’re actually delivering more, I think they are much more willing to pay those. You know, nobody is happy about it, but they are not quite as unhappy as they otherwise would have been. ASSOCIATE SALARY SEGMENTATION BROWN: La Fonte, you’ve raised the issues of associate salaries. Let me broach the question of segmentation: Most firms matched the salary increase to $160,000. Are we at a point, though, where, in the next round of increases, we may see a break? Are some firms just going to go above the market, with other firms saying, “You know what, we have had enough. We are going to stay here”? NANNES: I think there will be some type of segmentation; yes, I do. I also think that � emphasizing La Fonte’s point � what continues to interest me on [billing rates] is that clients’ resistance is much more to increases in associates’ rates than the partner rates. They will pay for expertise. They pay for experience, and they pay for talent. You are seeing clients getting very smart as to what they are doing based upon those rates. For example, insisting upon using temporary attorneys for certain tasks that don’t require an associate and sometimes contracting for temporary attorneys themselves. So, they are going to peel back our model � and they are smart. A lot of them have been in our roles before, and they know how much a law firm is worth. They are getting very smart. RUYAK: I think the associate salary structure is the most arcane, idiotic thing that exists in any business in this country. In fact, we are the only business that does it. Name one other business that has a similar methodology for paying people that’s based on years out of any school. None of them do, really, because that doesn’t make any sense. Yet, we have perpetuated this for some idiotic reason. We [at Howrey] are changing that. We are going away from that, because we think we have to…. We’re not going to call people associates who aren’t. That’s the problem. Associates should be young lawyers who are earning their way toward partnership…. Let’s simply say that there are categories of lawyers who are not on a partnership track; pay them less; charge them out at less; have them do those functions that are not the functions that lead toward partnership. If we are going to be forced to do that anyway by clients, we might as well take the advantage and do it now. And guess what? It’s more profitable. NANNES: On the associates front, I mean, we have read more about Generation X, Y, Z and all the others. So, we probably can’t read anymore…. But there is value for staying with this relationship for the long term. If you care about them, you invest in them, and allow them participate in the process. Even when you do a good job at that, you’re still going to have an atrocious attrition rate. It is just the nature of our profession. DWYER: I think all of us are very much focused on working with associates, getting them ingrained into the pulse of the firm, so they are longtime members of the firm. We spend a huge amount of money, whether it is the summer associates’ program and all the recruiting time that we spend in that and then the years of training them that, we don’t want them to � we don’t like to lose them. I think the way we do that… is giving them meaningful experiences where they really feel that there is something of value that they are aspiring [to], through pro bono programs and paying attention to work-life issues and all of those things. But I think within our firm we also do it with the client and industry and multidisciplinary team approach, because the associates get to work directly with a client. They get client contact. They are working with partners. They are going on client pitches. They are really getting a one-on-one mentoring relationship with that partner and that client as to how you go about cultivating the business. NANNES: Actually, I was hiring chair for a very long time before I got stuck with this job. The thing that strikes me is… how low the expectations are � even for the best first-year associates that you bring in � in terms of whether they are going to spend a career with this institution or not. Many of our new associates arrive � I know, even though they wouldn’t say it to me when I was hiring chair � thinking: “I’ll go there for two or three years, and I’m going to go and do something else.” So, it is the real challenge for us to convince them, once they are in the door, that they do have a future of 40 years with this place, a good one. I mean, obviously there is a lot of sifting that goes on in those first few years, but it is very difficult to do. The most important thing is getting partners to work with the associates so that they have a good sense of what it is to make it and to give them a reason to stay. It is the biggest challenge we have, particularly when we are paying them $160,000 a year out of the box. ALTERNATIVE BILLING ARRANGEMENTS BROWN: Are you still experimenting with contingent fees? Can you talk about some challenges and opportunities? RUYAK: We definitely are…. We do very few total contingency cases, but we do a lot of mixed, discounts for bonuses. A lot of that is going on, and I think that’s all very good for both the firms and the clients. NANNES: On the contingent side, clearly it is a way to show clients you are going to partner with them, and add value with them, and take risks with them…. Some want to go for straight fee billing, but they appreciate that you’re willing to partner with them. I don’t think, though, that the billable hour has evaporated as quickly as folks thought it would. I mean, I have been reading articles for 20 years that it was dying, and I think part of that process is that there are certain aspects of our profession where it is beneficial to be creative and certain other areas where it is smart to be defensive. But partnering is absolutely huge, and I think that contingencies and partial arrangements are win-win situations and are very important. It works in the transactional practice as well. If you have a portfolio of transactions you do with a client, and you can agree that when a deal does not go forward, that you are going to give them a substantial break. You do it so that you will be with them for the next deal. You have to listen to your clients, and there may be a reason for their pricing, or why for a junior vice president on the way up, it helps to position things a certain way. You should be listening to that. That is hugely important.

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