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The voices whispered into the ears of managing partners at large Philadelphia law firms two years ago. They said: “Don’t raise starting salaries from $75,000 to $90,000.” The voices grew stronger last year when firms upped the ante to between $100,000 and $105,000. The voices reasoned that the booming economy would take a downward turn eventually and firms would have difficulty footing the bill. And the end result, the voices said, would be that those same young lawyers now receiving bloated salaries would pay the ultimate professional price — with their jobs — for a shortsighted managerial decision. A little more than a year later, those voices are not exactly prophetic but they certainly are growing even louder. The economy has taken that aforementioned downward turn, firms are not as busy as they have been in recent years and managing partners are plotting their next move. With the raises doled out during strong economic times and firms trying to pay for them during a slowdown, the ugly word “layoff” has begun to spill out of the mouths of some respected law firm consultants as the eventual and most viable alternative. “Firms overpaid to get the top graduates, and the end result is that those who don’t have the credentials are still getting paid at that level,” Altman Weil’s Ward Bower said. “And that’s a big problem in Philadelphia because most of the top graduates go to other cities like New York.” “I really think the firms that will come out of this the best are the ones that make the tough decisions,” Bower said. “The advice I’m giving firms right now is to manage your overhead and evaluate lawyer productivity. Bower said firms need to keep track of staffing ratios and expenditures in technology and marketing. And they need to evaluate what lawyers and what practices are strong and which ones are not, and then act on that information. “Firms won’t call them layoffs — they’ll call it culling,” Bower said. “You keep your best people and evaluate the bottom half.” In terms of those “bottom half” associates, firm management tells the least productive that their partnership prospects are low, and they should think seriously about finding a job elsewhere. A recent example of this can be found at Morgan Lewis & Bockius, which said that it carries out this practice annually. In January, firm management informed roughly six associates of their diminished prospects. While no other firm has admitted to this practice, sources say Morgan Lewis is not alone. Like Bower, legal recruiter Michael Coleman of Coleman Legal Search lived through the last round of layoffs in the early 1990s. He said that rent and employees consume roughly two-thirds of a firm’s costs. So if a firm wants to cut expenses, looking to staff is the only available option. “It’s never an easy thing to do, but as we go into the second decade of law as a business, firms are going to continue to act as a business,” Coleman said. “The legal community is much slower to act than the business community. But you have to make the decisions eventually. That’s why you have survivors and some firms that are not. This is why partnerships elect leaders; to make tough decisions like these.” Bower said in the short term, most firms are paying for last year’s associate raises by having partners take less money. But he said that cannot persist for too much longer or it will cripple competitiveness for recruitment and retention of top legal talent. Another possible way to pay for the raises is through increased billable hours. But Bower believes that associates at many firms have already been driven to the max in that area. “There are only 8,760 hours in a year and only so many of them can be billable,” Bower said. Raising billing rates is another option. Bower said the rates currently set by firms are comparable to other industries, but scrutiny is much higher from clients wary of being asked to foot the bill for what they think amounts to nothing more than paid training for inexperienced associates. THE VIEW FROM IN-HOUSE Rohm & Haas general counsel Robert Lonergan said firms have raised rates from a standard-of-living increase of 3 percent or 4 percent to as much as 15 percent. When he sees a big bump in a bill, he said he calls the firm and asks for a reason behind the change, since Rohm & Haas has guidelines with its clients that spell out billing procedures. Lonergan signs off on some bills but says others are negotiated down. “I think with all of the high-priced young lawyers, the firms are going to be faced with difficult economic choices,” Lonergan said. “And for the clients, the [salary] raises have made us place even more scrutiny on bills.” “But I think the attitude is changing in most markets. Most firms will work with you [in negotiating billing rates]. In Philadelphia, we have long-standing relationships with firms, and the rates are more reasonable than in some other markets. And the quality of work is just as strong.” IKON Business Solutions Inc. general counsel Don Liu said some firms actually told him as early as last summer that billing rates would be increasing come 2001. “I don’t think you’ll have a sympathetic reaction from clients,” Liu said. “I think it could border on hostile with the economy the way it is now. “I think the firms put themselves into kind of a bind. They made all of these decisions while they might have overrated the period of economic growth and the amount of legal work there would continue to be. Now we’re in a down cycle, and they still have to deal with the same salaries.” Liu said unlike the last economic downturn a decade ago, younger associates could be more vulnerable to layoffs than more experienced associates. With most firms operating under a compressed salary structure, experienced associates are not getting paid that much more than their more junior counterparts, who are not nearly as productive. Bower concurred with that assessment but he also said that less productive “service partners” could also be in trouble because experienced associates could fill their role quite easily in most cases — and at a lower cost to the firm. What you won’t see, Bower said, is a hiring moratorium because firms got burned when they imposed them a decade ago. When the economy improved in 1993, firms had a dearth of experienced associates at a time when they suddenly became very busy. FIRM REACTION As for the firm leaders themselves, none will admit to being significantly affected by the downturn, let alone considering layoffs. “I think at certain firms, you will see service partners begin to scramble,” Saul Ewing managing partner John Stoviak said. “I think there’s some concern by firms that are heavy on the corporate side. I sense that people might be concerned that things are showing signs of being a trendline, but no one is panicking. “You might see more happen at the end of the year, because that’s when firms look at how they did the previous year and figure budgets for the next year. And they also will have had more time to see the economy work itself out, one way or the other.” Many attorneys said they believe if the economy continues its downward trend, those with the profits to keep up with salary trendsetters Morgan Lewis and Dechert will be separated from those that don’t. “I think there are some vulnerable firms in town,” said one chairman of a large firm who asked not to be identified. “You’ll continue to see a shakeout that will separate first tier firms and others. And layoffs are clearly possible.” Cozen & O’Connor managing partner Tad Decker said because of the investment put into associates, partners will become less tolerant of weaker performers. “We’ve always been very paternalistic, and we’ve tended not to do that here but it might start to happen,” Decker said. Obermayer Rebmann Maxwell & Hippel partner Paul Diamond, whose firm did not match the top associate salaries like other firms, has been an outspoken critic of the salary increases since the first round almost two years ago. He said the handwriting has always been on the wall. “It’s one thing to raise salaries to pay top dollar in town,” Diamond said. “It’s another thing to raise them to compete with top firms in other cities. [Law students] are either going to come to Philadelphia, or they’re not. The only thing that raising salaries was ever going to do was tick off clients by raising their rates or ticking off partners by taking money out of their pockets. “So in the end, we’ll either crush the life out of the associates or considerably diminish the income of partnership in pursuit of a chimerical hope that we can compete with a market that we can’t possibly compete with. We’re supposed to be creating more attractive lives for our associates but in the end, we’re just hurting them.” Coleman, though, does not fault firms for raising the bar. “When you have a lot of business in strong economic times, you don’t want to give it up,” Coleman said. “So it’s not unwise or overpaying. It’s merely responding to the natural flow of the marketplace.”

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