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Troubled economic waters make it tricky for Texas firms to chart a smooth financial course — meaning most firms didn’t make any drastic changes in salaries or billing rates over the past year. Averages in Texas Lawyer‘s 2002 Salary & Billing Survey reflected a holding pattern in salaries, showing salary increases ranging from 3.7 percent (legal secretaries with seven or more years’ experience) to 7.9 percent (paralegals with four to seven years’ experience). Average associate salary increases were 4.8 percent for first-year associates, 7.1 percent for fourth-year associates and 5.4 percent for seventh-year associates. “I think people are taking it slow and waiting for the recovery,” says Kirk Sniff, managing partner of 212-lawyer Strasburger & Price. It’s all about supply and demand, says Mike McKool, managing partner of 56-lawyer McKool Smith. “The demand for legal services is going to drive salaries,” he says. “The desire for services leads to a desire to expand, which leads to higher salaries.” High demand for legal services was the driving factor behind associate salary hikes two years ago. “The 1999-2000 salary increases was the second-dumbest thing law firms as an industry have ever done,” says Howard Mudrick, president of Carrollton-based HM Solutions, a law firm consulting company. The first mistake, he says, was when firms made similar salary hikes in response to the “blowing and going” economy of the 1980s. “Now it’s happened again — a recession has followed salary hikes,” he says. But there is one big difference this time around: The industry hasn’t seen the widespread carnage of massive layoffs it saw during the last recession, he says. “I think that will serve law firms well when the economy starts to improve,” Mudrick says. “We won’t have to go through the hiring frenzy that happened in ’92-’93. Hiring frenzies create salary wars.” Some experts also cite Sept. 11 as a major difference between today’s recession and the economic downturn of the early ’90s. However, people who think that the tragedy the United States experienced in September was responsible for economic hardships in the legal industry are mistaken, says Richard Pullman, managing partner of Dallas-based Vial, Hamilton, Koch & Knox. “Sept. 11 was a catalyst — a wake-up call to where we were already heading,” he says. Clients displayed an unwillingness to pay the legal fees necessary to support the overhead created by high-priced associates and other traditional luxury trappings associated with law firms long before that tragedy, he says. “You pick up any edition of the Wall Street Journal and you read about layoffs and potential bankruptcies,” Pullman says. “Law firms have been unwilling to understand that they play in the same arena as their clients. When the client is scraping for a profit, we can’t expect to maintain the same overhead and charge them the same fees as we did during boom times.” With 39 attorneys, Vial Hamilton is an example of a mid-size firm that succeeds by refusing to pay three-figure salaries to new associates. It has five first-year associates coming aboard in October, Pullman says. “We’re cutting salaries, and we’ll do whatever we have to in order to keep our rates competitive,” he says. Other mid-size firms, such as 39-lawyer Scott, Hulse, Marshall, Feuille, Finger & Thurmond, recognize they can’t compete with Dallas and Houston firms based on salary rates, says Eric Brittain, chairman of the El Paso firm’s recruiting committee. “We keep a focus on people with El Paso connections,” he says. “Conversely, we have lower billable hour requirements.” Survey averages for weekly hours billed remained constant for firms responding to this year’s survey. For many firms, recruiting talented associates — new and experienced — is the ultimate goal. “This is a talent business,” says Bill Brewer, co-managing partner of 58-lawyer Bickel & Brewer. “If you look at the most successful firms, they’re the ones who have the best talent.” He attributes the consolidations in the legal industry to an attempt to garner “economic might to compete for talent.” But for Brewer’s Dallas-based firm, paying high salaries is a way of life. “Across all our groups, we are way above market. We intend to be,” he says. “Yes, our firm asks a lot of its employees. But we feel like if a lot is asked and given that the rewards are there. … Extra income means you can hire someone to do your lawn, and you can play with your kids.” You get what you pay for, adds McKool. “The issue with salaries isn’t how much you pay, it’s how much value you get,” he says. “To me, it’s more a matter of choosing the right people. You have to pay higher salaries.” Mike Gruber, managing partner of Dallas-based Godwin Gruber, agrees. “In order to keep up with the associate pool at large firms, we’ve raised our salaries substantially.” Money for salaries, however, has to come from somewhere. Large firms paying mega-bucks for salaries must lower their costs of operations, says Bill Graf, president of Dallas-based Law Firm Management Consulting. One approach is to move to a merit-based bonus system rather than using the traditional lockstep bonus system in which associates in the same class are given a standard bonus. “I could see some people moving to this type of system now because it shifts some of the risks to the associate,” says Sniff, of Dallas-based Strasburger & Price. Pullman agrees. “If we’re not satisfied with your performance, there may not be a bonus. It makes better business sense,” he says. “I never understood lockstep. You want your associates to be teammates, but how many environments can you think of that everyone makes the same based on when you started?” The traditional thought on lockstep bonus systems was that it would create more of a team environment among associates rather than a competitive environment, says R. Bruce McLean, managing partner of Dallas-based Akin, Gump, Strauss, Hauer & Feld, which has 1,006 attorneys firmwide. That system also takes subjective viewpoints out of the bonus equation. “Associates as a whole would prefer not to have differentiation. It makes the environment less stressful and less competitive. They don’t want to feel like they fail,” he says. “However, if you want a bonus to be a true bonus, it should be performance-related.” It’s all about common sense, Mike McCurley of Dallas-based McCurley Kinser McCurley & Nelson says. “You have to feed the horses that run the fastest.” As part of its merit-based bonus system, Gruber’s 105-lawyer firm encourages associates to recruit clients. “We make available a minimum of $150 a month to do client development,” he says. “We’re paying 10 percent of originations to junior associates and 15 percent to seniors. It’s amazing — we have a lot of people making a lot of money on their own originations.” CONTINUED SUPPORT This year’s survey showed 3.7 percent to 5.9 percent salary raises for legal secretaries and 5 percent to 7.9 percent increases for paralegals. Firms report little turnover in these positions — a level of stability that is precisely the goal, say Gruber and Brittain. And job stability is important, Gruber and Brittain say. To that end, the firm pays placement bonuses to staffers who recruit other employees. “They do a lot of screening for us because they don’t want to work with someone unpleasant,” Gruber says. “That’s led to a stable and homogenous environment.” While experience is important, many firms don’t mind devoting resources to training. “We have a whole room set up for that,” Gruber says. “It’s almost a benefit. People are attracted to the ability to receive the training because they know it makes them more marketable.” The paralegal profession is one of the top 10 growing professions in the United States, according to the Department of Labor, Graf says. “One of the secrets of law firms is called leveraging,” he says. “Firms are beginning to recognize that there’s a good leveraging factor for legal assistants. That’s an advantage to the firm and to the client. Some work that might be done by a partner can be done by the paralegal at less cost. Another good thing about them is they don’t ever become partners.” Consultant Mudrick agrees. “Law firms have never really figured out how to utilize paralegals,” he says. “I really think that the first firm that figures out how to utilize paralegals to service clients’ work wins the game.” Salaries at the paralegal level are expected to remain fairly stable, Graf says. A major factor behind the salary stability seen in lawyer and support positions is an abundance of people looking for work in the legal industry, Sniff says. “The failure of many tech-based businesses and dot-coms put a lot of r�sum�s on the market,” he says. “There is a significant number of r�sum�s out from the big expansions in law firms two years ago. Many are electing to look for jobs or have been laid off, especially in Austin.” Brewer also sees a lot of applicants. “There’s a huge Rolodex of people who are looking in the law firm industry at every level,” he says. “We don’t try to find out if that’s endemic of the firm they come from. We realize in times of economic stress, people will look for other opportunities.” McCurley attributes the abundance of applicants to previous associate salary hikes. “They drove those salaries through the roof. I think there has been a backlash. It was a mistake to the common observer. Shortly thereafter, people were being paid to get released from those salaries,” he says. ABOUT A BILL Like salaries, billable hours also saw little movement. According to this year’s survey, only small increases were seen in hourly billing rates. The highest increases were for equity partners — an average of 6.3 percent. “We have the old underwear syndrome going on now,” Mudrick says. “The hourly rates for associates have really crept up to the partner rates. Differences are minimal. Clients are saying, ‘Give me partners to work on my stuff since there’s not much difference.’ Clients are demanding more of the partners’ time. A greater demand on their time means they can raise their rates, and they ought to be looking at raising their rates at the top.” However, it’s a thin line to walk now because clients are extremely sensitive to higher costs, Brittain says. “Concern about billing rates can be linked to the low economy,” he says. “Certainly clients are concerned about that.” Clients are sensitive to getting value for their money, McKool adds. They understand higher billing rates for senior partners gives you more value, he says. But there’s not as much demand in a down market. “You’re going to lose the clients if you raise rates. … In our case, we kept ours relatively flat.” Graf agrees. “Even mid-sized and smaller firms are walking on eggshells,” he says. “With the economy the way it is they don’t dare raise their billing rates 20 to 25 percent because they don’t want to lose clients.” Billing rates should remain relatively stable for the foreseeable future, McCurley says. One method for giving clients more perceived value for their dollar is stepping away from hourly billing rates to explore alternative billing arrangements. “We have some clients who are interested in flat-rate fees. Also blended fees for all the same rates for all shareholders,” Brittain says. Gruber’s firm is also trying new billing methods. “We’re really seeing a whole lot more reduced hourly rates with some sort of performance-based incentive,” he says. “We like that. The client gets the benefit of most of the collection. The reduced billing rate may be $200 an hour instead of $300, and we take 10 to 20 percent override of what we collect. We’re trying to do defense cases with criteria for bonuses with some reduction in fees. … There’s some profit built in and your costs are covered. You don’t get as much for a big verdict, but still there’s some incentive to bring home the bacon.” However, there are dangers in using flat fees and contingent-fee arrangements, particularly for small and mid-size firms, Graf says. “Some firms get sucked into taking contingency work,” he says. “We’re talking big-ticket cases, not personal injury. The problem is they have to win to get paid. They divert too many resources into the case because they become enamored with the thought of the big hit. But they put too many resources there and run into cash-flow problems.” The danger with fixed fees is that a firm has to have done a lot of that type of work so it knows what fee to charge. Otherwise, it might charge too little and fail to cover its expenses, he says. No matter what billing method you use, the important thing is staying on top of collections, Graf says. “This has to be done in a timely manner.” Pullman agrees. “We’re staying after it on collections,” he says. “The only place I’m spending extra money is in accounting.” The economy is more stable today, says Gary Eden, executive director at Dallas-based McKool Smith. “The market is now idling along — it’s not ready to take off, and, hopefully, it’s not going to fall through. I think it’s going to stay relatively stable for the foreseeable future.” Law firms are built on tradition, Mudrick says. “If it hasn’t been done traditionally, there better be a compelling reason to do things differently. The compelling reasons are client service and profitability. … They have to consider new ways of doing things.” Things firms should consider include better use of paralegals, less direct hiring from law schools and how associates are compensated, he says. But don’t get caught up in fads. “One thing firms have to be careful of is trying to fit each firm into the same mold,” he cautions. “Cultures and personalities are different. What works at one firm might not work at another.”

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