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The treacherous business climate means that the need for decisive action is greater than it’s been in years. But law firm leaders must act wisely: Slim profit margins leave little room for missteps. We asked 10 experts on law firm management to evaluate specific responses to the recession. Here are excerpts from what they said: � Raise hourly rates? Ward Bower Principal Altman Weil Inc. Large firms should raise hourly rates selectively, not necessarily across the board. By “selectively” we mean: In practice areas that are in the greatest current demand, such as bankruptcy and litigation; in cases where the market rate for mid-range and more junior partners can be moved closer to senior partner rates; and in instances where multiple rate structures exist for premium and discount rates, but possibly not for standard rates. Rates must be evaluated annually, as costs inexorably increase. If rate evaluations are not done annually, opportunity is lost, as it is hard to catch up with major increases in a time of intense client scrutiny of legal fees. Bradford Hildebrandt Principal Hildebrandt international Increases in hourly rates over the last three years have been substantial. During slowdowns, there is a lot of pressure on fees, not necessarily on rates. Being able to work closely with clients to respond to their needs is the most important thing. We do expect that there will be an increase in rates in 2002 of approximately 5 percent to 6 percent, despite the recession. John Henry II Chairman and CEO elawforum Corp. For the past year we have been working with general counsel in major corporations. They are not going to accept rate increases from law firms. The market is finally beginning to demand that the major law firms price more competitively and move away from hourly rates to share the risk with their corporate clients. David Maister Consultant The questions law firms should be asking are: In what ways have we changed the way we practice to be more valuable to our clients? Would they agree we are now more valuable to them than we were two or three years ago? If the answer to these questions is “no,” then raising rates would be crazy. Prices are a reflection of relative scarcity — the balance of supply and demand. It’s all very well that you can do wonderfully valuable things for clients, but if 20 other firms can credibly achieve the same thing, the price you can command won’t be high. The key to raising rates successfully is to work with clients in ways they both value and do not commonly find among law firms. � Increase partners’ equity contributions? Take on more debt? Maister Partners’ capital contributions have generally been increasing. It is simply prudent management to have a war chest during an economic slowdown. One thing that is eminently clear is that banks are never friends of law firms during slowdowns. We are already seeing banks question the balance sheets of their law firm clients. Danilo DiPietro Head, law firm group The Citigroup Private Bank Our survey indicates that large firms need to build their capital to be more in line with their debt levels, which have increased substantially in the last two years due to heavy real estate and technology expenses. The good news is, most firms have already begun working with us to do just that. Timothy Leishman President Leishman Performance Strategy Inc. Many firms are undercapitalized to meet the double whammy of a depressed economy and increasing financing demands due to globalization, technology and leverage of associates. It is time to get partners in many firms thinking like partners again. Increasing capital contribution, rather than taking on more debt, can help refocus partners on long-term growth. Barry Rosenthal Leader, service and nonprofit dept. American Express Co. It is important to increase equity partners’ capital contributions on an annual basis to pay for items such as increased costs of technology and leases. It is critical to hold back some distributions for capital contributions and not take on new debt. � Merge? Take on laterals? DiPietro In stock market lingo, this is a good time to buy. Firms with strong margins, good partner cohesion and a strategic vision are well positioned to cherry-pick from firms that don’t possess these strengths. Partners with profitable practices at these lower-quality firms are increasingly worried about their firms’ viability, and this makes them more open to moving. Bower Large firms should take advantage of the current recession to acquire firms, practice areas and laterals, focusing particularly on distressed and undercapitalized firms where competent partners are seeking better economic opportunity. Growth by these means requires working capital, and undercapitalized firms may not be able to pursue such a strategy. Michael Rynowecer President The BTI Consulting Group Now is a good time for large firms to merge to strengthen their position within key clients — that is, mergers between firms serving the same clients could provide some real, sustainable advantage. Leishman A tough economy accentuates the gaps in the pecking order of firms. Second-tier firms — regionally or globally — will feel a stronger urge to merge to reposition themselves and defend against lateral recruitment by top-tier firms. But just because one can doesn’t mean one should. Mergers rarely make sense. Rosenthal About 75 percent of [proposed] mergers do not become a reality, and in difficult times merger is not the best strategy. Hiring laterals with good books of business is a better idea. Maister The overwhelming majority of mergers fail to deliver any positive impact on profits per partner and are a huge diversion of management attention. On the other hand, a firm should always be on the lookout for selective laterals who can help get the firm into new areas and disciplines. Just looking for big names isn’t sufficient. A lateral only helps if he or she is able to help the firm build a practice area, and that takes someone who is prepared to act as a team player, invest in the future, and coach others. Too many “big-name laterals” are, in fact, lone wolves who just want to get paid more for their books of business and have no interest in sharing or institutionalizing their skills. � Roll back associate salaries? Bower Large firms already at the top of the starting salary market need not push the envelope further in a labor market characterized by slower growth and reduced hiring. Salary increases for incumbent associates should be minimal until the market requires real increases. The dynamics of the [current] labor market should allow for correction of the reduced margins resulting from dramatic increases in 1999 and 2000. Rynowecer Experience in other professional service firms shows that rollbacks can have a long-term negative impact. They discourage current associates and can undermine the best of recruiting efforts. It may be time to restructure salaries, with bonuses to remain competitive for the best and brightest, while managing the cost structure. Peter Zeughauser Principal The Zeughauser Group There are two issues here. The first is merit pay aimed at keeping the keepers — partners and associates. The second is market conditions: The nature of a firm’s practice, its financial health, utilization, leverage, and its need and ability to attract and retain keepers should dictate what lawyers are paid. Maister The underlying people crisis — the “war for talent” — is still there. There remains a shortage of young knowledge workers, and as soon as this recession goes away, we’ll be back in the same mode we were 18 months ago, bemoaning the lack of talent available to fill the demand. Associates are paying close attention to how firms handle themselves in the down market. Patrick McKenna Principal Edge International Tower Snow Jr. [the former chairman of San Francisco's Brobeck, Phleger & Harrison], claims he didn’t say this, so allow me: “Any partnership that would lay off associates during an economic downturn is morally bankrupt!” It’s shortsighted to circle the wagons and fire inward. There is a need for foresight and preparation for when the economy turns around. This is a time for firm leadership to declare that we’re all — partners and associates — in this together, and it’s going to require some short-term salary reduction sacrifices. � Reduce the size of equity partnerships? Zeughauser Generally, this is a good idea if it is done for the benefit of the partners who contribute most to the firm’s success. For starters, culling underperforming partners and tightening partnership admission standards are good ideas. The bigger issue, though, is creating and getting buy-in on standards that govern how partners move up and down in profit-sharing. Hildebrandt Because firms have increased the accountability of their partners, we will not see the kinds of difficulties they experienced with problem partners during the last recession, especially since so many firms have adopted two-tier partnership structures. Partners who have performance issues should be counseled and appropriate measures taken. It is one thing to deal with partners with performance problems and quite another to deal with partners whose business base has been hurt by changes in the economy. One of the biggest mistakes of the last recession was cutting professional staff at all levels too severely, causing the need for major lateral acquisitions, which in many ways fueled the salary escalation of the last five years. McKenna Peter Drucker once said, “A firm that takes pride in never having lost a partner is like an individual taking pride in never having gone to the bathroom. They’re just admitting that they don’t know how to eliminate their wastes.” This is a time to take decisive action to ensure that equity equals contribution, to help those capable of being coached back to a level of acceptable performance while eliminating partnership-admission mistakes — not simply to raise profits per partner, but to raise the standards for all equity partners. Maister It’s certainly time that firms ensure that all partners with equity make a contribution commensurate with that reward, but the first step should be to try — through guidance, coaching, support, practice group management and the like — to help people contribute. A firm would be much healthier if it could get a high percentage of its people to the point where they earn and deserve equity. A knee-jerk policy of “You’re either a superstar, or we’re going to take your equity away: You figure it out!” is not exactly a sophisticated approach to management, yet it’s increasingly common.

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