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Profits at Latham & Watkins dropped last year, and top clients are nervously reducing costs. But that doesn’t mean the Los Angeles-based giant is zealously clamping down on its own expenses. The firm just opened new offices in Hamburg and Frankfurt, hosted a firmwide gala in Atlanta, and still offers partners a $9,500 office decorating allowance. “It’s not as if we’re completely immune from the economic slowdown,” says managing partner Robert Dell. But, he adds, “we’re not feeling it dramatically.” Just about every industry — from telecom to trucking — is laying off workers and cutting overhead. Most well-managed businesses brag about cutting the fat. But for their lawyers, the passion for pruning payables has only begun to take hold. It’s no surprise that the first sounds of hedge clippers come from the tech firms. But tech-addicted or not, all face a universal truth: Expenses have ballooned since 1998, and not just because of associate pay increases. Higher rents and huge technology outlays are the rest of an operations-cost triple whammy. And then there are the wretched excesses, the galas and perks and whatnot that got a “little undisciplined during the fatter years,” admits David Laney, chairman of Dallas-based Jenkens & Gilchrist. Lisa Smith, a consultant at Hildebrandt International, likens the recent cost run-ups — especially discretionary spending — to the gluttonous 1980s, when spending at law firms became “a free-for-all.” In many cases revenue gains have kept pace, but profits will be squeezed if the staffing and overhead remain in place when revenue slows. Firms know this, Smith says, and are working now to bring spending back to “reasonable” levels. The penny-pinching varies, depending largely on the time zone. On Wall Street, many heads of Am Law 100 firms seem unfazed by the rain of pink slips outside their office windows. More Goldman Sachs bankers now must hail a cab instead of keeping a Town Car idling at the curb, but don’t expect a Simpson Thacher & Bartlett press release on innovative overhead-slashing. “Obviously we’re not doing the same as last year or even the last number of years, but we don’t find the need to manage ourselves any differently,” says Simpson Thacher’s Richard Beattie. At Skadden, Arps, Slate, Meagher & Flom, managing director Earle Yaffa says a drop in per-lawyer billable hours triggered a lateral hiring slowdown and led to fewer jobs for college-age clerks. But that’s about it. There will still be plenty of theater tickets and Yankee games to wow Skadden’s record summer class of 260 associates. “We don’t see things getting worse,” says Yaffa. Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy, isn’t taking any chances. “If we wait until we’re really affected by the downturn, it’s usually too late,” he says. “It takes a long time to turn around a whale like a law firm.” So while Milbank lawyers can still tool around in shiny black sedans, they’re no longer allowed to use the firm’s toll-free number when in New York City. “We were spending $100,000 a year for people to make local calls in Manhattan,” says Immergut. He also shaved $100,000 by returning leased fax machines and $85,000 by putting only one person in charge of ordering paper clips and other office supplies. But when it comes to taking more severe measures — say, limiting swank summer events — Immergut recoils: “So far we’re looking to save on things that are ‘nice-to-haves’ but that you can pretty easily learn to live without.” Head west, and the cutbacks get more painful and public. Brobeck, Phleger & Harrison chairman Tower Snow Jr. is aggressively slashing spending. Snow’s sad song? “A dollar in costs equals a dollar in profits.” Snow is hoping to add at least $10 million — possibly even $20 million, he says — to the bottom line by axing nonbillable meals, travel, and entertainment, by discouraging the use of messenger services and FedEx, and by cutting back on after-hours receptionists. A Lake Tahoe associate training session will be held closer to home, and the 130 summer associates will have to subsist on four lunches per week paid for by the firm, rather than all five. Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati is adding $3 million to its bottom line by canceling its posh Pebble Beach attorney retreat last spring. The firm hopes to save another $9-12 million. The targets? Meals, office and tech investments, and some summer associate frills. Palo Alto’s Cooley Godward put the kibosh on most intraoffice practice group lunches, instituted an approval process for all nonbillable travel costing more than $1,000, and shifted its annual partner convocation from sunny Santa Barbara to San Francisco. In response to an 8 percent drop in billable hours since last year, Pillsbury Winthrop’s Mary Cranston says she’s looking to squeeze $10 million out of the budget. Line items on the chopping block include deferring at least $2 million in technology upgrades, paring the staff-to-attorney ratio to 1:1 or less, and saving up to $5 million in headhunter and training costs because of a freeze on lateral associate hiring. She’s also considering cutbacks in charitable donations, which can top $2 million a year. Palo Alto’s Fenwick & West cut its advertising budget and feeds its drones pasta instead of sushi. But Fenwick still helps lawyers pay for Fido’s veterinarian visits under a firm-sponsored pet insurance plan. “We’re trimming expenses in prudent ways,” says chairman Gordon Davidson. Outside New York and the San Francisco Bay Area, a few Am Law 100 leaders admit to being jittery — and tightening their belts a notch. They, too, report that billables per lawyer are down or flat and that clients are starting to ask for reduced rates. At Winston-Salem, N.C.’s Womble Carlyle Sandridge & Rice, a committee swung the ax after partners complained that spending controls had become too lax, especially after last year’s associate salary hikes. The committee lopped $2.5 million off the 2001 ledger by, among other things, capping headhunter fees at $250,000, limiting temporary staff, and outsourcing $600,000 in technology support functions. A dollar here, a dollar there — it all adds up, notes John Garrou, Womble Carlyle’s managing partner. In Dallas, Jenkens & Gilchrist’s Laney says the firm isn’t suffering yet, but its clients are. Thus, a top-to-bottom audit. “We’re bracing for some sort of impact,” says Laney. Those that haven’t cut yet keep their plans nearby. Late last year, Goodwin Procter’s Regina Pisa ordered all managers to brace for 10 percent budget reductions. Pisa, the Boston firm’s managing partner, says the feared shortfall hasn’t materialized yet, but she’s ready to issue the edict if necessary. In the meantime, Goodwin Procter’s perks — such as paying for cooking classes by a top Boston chef and offering family counseling — remain in place. The late ’80s stock market slump had a delayed reaction of about two years in the land of Big Law. By that measure, the past year’s Nasdaq-induced slowdown is still just a whiff of rain from the West on a balmy summer night. If — when? — the deluge hits, pet-grooming and posh parties will go. But only for starters. “Squeezing expenses can be an important political act but it’s not going to rescue a bad year,” says the chairman of one Am Law 100 firm. “The only way to really cut costs is to decrease head count.” Get out the umbrellas. WHERE THE MONEY GOES Expenses as a percentage of revenue for the typical Am Law 100 firm: Net Income: 32 percent Legal Staff: 28 percent Other Staff: 17 percent Real Estate: 8 percent MIS: 4 percent Marketing: 4 percent Liability Insurance: 1 percent All Other: 6 percent Source: Hildebrandt International Krysten Crawford, a former senior reporter at The American Lawyer , is a free-lance writer in San Francisco.

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