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Average billing rates increased this year at a rate almost double last year’s, according to Texas Lawyer‘s 2001 Salary & Billing Survey. So are the rate hikes a byproduct of 2000′s skyrocketing associate salaries? The answer varies depending on whom you talk to. According to the survey, billing rates went up across the board regardless of a firm’s size or location. Survey averages show equity partners raised their rates 10.4 percent, fourth-year associates’ rates increased 11.8 percent, and first-year associates’ rates rose 11.6 percent. Last year, equity partners raised their rates 5.7 percent over 1999, followed by a 4.9 percent jump for fourth-year associates and 4.4 percent increase for first-year associates. While higher associate salaries can mean higher billing rates, some managing partners point out that a variety of other factors play a role, such as high-demand specialty practice areas and rising lease costs. “There are clearly some practice areas where there are significant levels of competition for work that keep the rates at lower levels than others,” says Joe Dilg, a partner and member of the management committee at Houston-based Vinson & Elkins, which has more than 780 attorneys firmwide. “At Vinson & Elkins, we’ve tended to move our practice into areas where we can provide higher value to the clients through expertise and efficiency.” A firm can charge a higher rate if it practices an uncommon specialty. Sometimes, lower rates are charged by lawyers trying to compete in more traditional practice areas. The cost of office space also is increasing, says Jimmy Irish, managing partner of Dallas-based Thompson & Knight. “Part of those rate increases are to pay increased overhead,” he says. “Houston has high occupancies, and Dallas is at the highest it’s been at in years. Rent and people are by far your biggest expenses.” Irish adds that Thompson & Knight raised its billing rates prior to associate salary hikes. “We paid for [billing rate hikes] with higher associate hours where we had some associates working below averages,” he says. “We came up with more uniform billable hours requirements. We have a sliding scale. We didn’t increase salaries all the way except for those who wanted to work those hours.” Other managing partners, especially some in midsized and small firms, say they haven’t raised salaries and, therefore, haven’t seen dramatic rate hikes. “We are not participating in the salary wars, so it hasn’t affected us,” says Richard Pullman, managing partner of Dallas-based Vial, Hamilton, Koch & Knox, a 46-lawyer firm. Jim Skochdopole says his approximately 40-lawyer firm keeps overhead down, meaning rates don’t have to be as high as those at large firms. Skochdopole is the managing partner at Dallas-based Bell, Nunnally & Martin. “We don’t have the cost structures they have at the large firms, so we’re able to keep our rates lower,” he says. “We look at rates every year and generally raise them or leave them based on a variety of factors, such as the quality of the lawyer’s practice, the experience of the attorney, the cost of providing legal services and the prevailing rates in the marketplace.” Firms in smaller markets, such as Corpus Christi-based Brin & Brin, which has 35 attorneys, aren’t able to raise rates much or match high associate salaries. “If we drew the large fee rates that the big firms do, we might pay more,” says the firm’s managing partner, Ron Brin. “We could charge those rates, but our clients would go elsewhere.” But Jim Cowles, a partner in Dallas-based Cowles & Thompson — which has 57 lawyers � doesn’t see how billing rate hikes can be linked to anything but associate salary raises. “There’s no question about it,” he says. “Enormous hikes on rates are perfectly understandable. You can’t pay those types of salaries without raising rates. We haven’t done that. We have eight new associates starting in the fall. We’re not paying salaries like the large firms, and we can’t.” Three consultants agree billing rate hikes are tied to associate salaries. “As associates came up with higher salaries, everyone else’s salaries went up,” says Bill Cobb, president of Houston-based Cobb Consulting. “That meant everyone else’s billing rates had to go up.” This creates a situation Cobb calls the “doom loop.” “When you’re working harder, your effective collective rate may be lower,” he says. “For example, if you’re asking associates to work 2,200 billable hours per year, you must work more every week to get that in. That means no matter how hard people try to manage them [associates], they may be doing some work that is not billable to the client. The billing partner must write those hours off … . They’re going to work harder to increase the revenues … . That time gets written off, and we end up with the same effective revenues where we were before, but everyone is working harder. “As billing rates go up, it creates a situation where the clients are becoming unwilling to pay those rates for people who don’t have the experience,” he says. “They’ll ask the partner to do the work but tell him he can’t use any associates or they’ll say they want significant discounts on those associates. That puts us back in the doom loop again.” Thompson & Knight’s Irish agrees. “I think there’s already a backlash of clients resenting the associates’ salaries. I don’t think the clients would stand for any more raises,” he says. “I think we’re seeing a very interesting concept,” Cowles says. “We’re paying them more than doctors out of school make. Come on, people. It’s more than some judges make. That’s really weird. There’s something out of balance there. “It’s really hard to go backward [with salaries],” he says. “I think we’re going to see some interesting things happen in the next two to three years. It’s way out of line. I don’t know what the options are — either let them go or force them to take a cut in pay.” “I see problems coming for them,” Irish says. “You can’t continue to work people 2,100 hours or more. I think they’ll find other jobs … . Another thing is that because they’re so expensive, you can’t have a lot of excess associates sitting around on the payroll. You have to keep them busy, let attrition take care of it or lay them off. It’s hard to see how the industry is going to roll out of this.” SURVEY METHODOLOGY Each year Texas Lawyer tracks financial trends in the state’s legal industry through the Salary & Billing Survey. The report compiles and analyzes information provided by firms of different sizes and practice areas. The firms respond to questions about employee salaries, billing rates, billable hours, other expenses and benefit packages. Because of the variations in how firms track their own data, these results are not definitive, but they do provide valuable comparative material for firm managers and employees. Forty firms responded to this year’s survey. The results are analyzed by city and size. Firms are divided into four categories by city: Austin/San Antonio; Dallas/Fort Worth; Houston; and other. The size divisions are: 100+; 50-99; 30-49; and fewer than 30. Of the 40 responding firms, 20 had fewer than 30 attorneys; five had 30 to 49 attorneys; nine had 50 to 99 attorneys; and six had more than 100 attorneys. Year 2000 figures were provided by the firms that responded to this year’s survey. To be added to Texas Lawyer ‘s e-mail survey list, contact associate editor Lisa M. Whitley at [email protected] or call (214) 744-7745.

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