Crains New York Business
Wage, rent hikes eat profits even as legal
market grows;
firms
watch pennies
by Tommy Fernandez It's been another good year for real estate attorney
Adam Bailey. Revenues at his firm have doubled over
last year's, so he regularly treats his 16 employees
to lunch.
He also took them to a Yankees playoff game, and even
bought some Broadway tickets for his top performers.
So
why is he preparing for the worst in the midst of
such growth?
His costs are skyrocketing. The lease on his 7,000-square-foot
office, for which he pays $12,700 per month, ends
this year. He anticipates that any new space he leases
in Manhattan will cost at least double his current
rent.
"I've asked my office manager and executive
assistants to save as much as possible," says
Mr. Bailey, who runs his own boutique firm. "I
have to assume that things will get tougher — I've
even hired an investment firm to see how we can make
more from the money we already have."
It's not only small firms that are watching their
pennies. This is the new world order for New York
City law firms of every size: aggressive belt-tightening
and soul-searching during years of relative plenty.
The pressure is on, even though revenues of the city's
corporate legal market grew at least 3% during the
first six months of this year compared with the year-earlier
period and are expected to continue to grow, according
to Citigroup Private Bank's law firm group. Few firms
can ignore the fiscal worries of rising overhead costs,
ferocious negotiations with clients on fees and, for
the largest firms, the first real associate salary
hikes in over five years.
Consequently, even as the market expands, some firms
are beginning to falter.
"It's a paradox; the industry is healthier than
ever," says Dan DiPietro, managing director and
head of client relations of Citigroup Private Bank's
law firm group. "But it disguises the fact that
some firms are increasingly distancing themselves
in profitability from others that are struggling."
Wage hikes are perhaps the biggest drain on profitability
this year. After five years of virtually no increases,
salaries for first-year associates at the leading
law firms soared $20,000, reaching $145,000 a year,
with more experienced associates enjoying similar
eye-popping raises.
Add benefits, administrative support, training and
recruitment expenses, and the cost of employing one
associate can run as high as $400,000 per year, says
Robert Link, chairman and managing partner of Cadwalader
Wickersham & Taft. "A wave of salary increases
can have a significant impact on a firm's bottom line," he
says.
Valued associates
And those increases trickle down to other firms.
Legal recruiter Michael Lord says management can't
afford to ignore these salary increases and other
perks because associates are the backbone of productivity
and the good ones are heavily courted by competitors.
"You never want to lose your associates, especially
the midlevel ones," says Mr. Lord. "They're
gold."
The price of real estate is the next major headache
for law firms, with rents jumping more than 25% since
2002. Law firms are in a tough spot, because they
need to be in pricey prestigious buildings in order
to attract talent and impress clients. To adapt, firms
are making more efficient use of their space and moving
as many back-office operations as they can to less
expensive locations.
John Hooper, partner in charge of the New York office
of Edwards Angell Palmer & Dodge, says that because
of the Internet, casework can be easily handled in
multiple cities, such as Stamford, Hartford and Providence.
Clients don't mind, as long as the service remains
the same. "We find that our clients appreciate
these and other efforts to control legal costs," he
says.
Clients want more
Lawyers have no choice but to consider these and
other options going forward. Cadwalader's Mr. Link
says that clients now want volume discounts from their
firms, performance-related fees and regular cost updates.
More clients are also allowing firms to bid for their
accounts online.
Meanwhile, clients of all sizes are moving business
to smaller firms, such as Morrison Cohen, to take
advantage of their cheaper rates: Morrison partners
on average charge about $400 per hour, just slightly
above the fees charged by associates at bigger law
firms.
Morrison Managing Partner David Scherl says that
his firm has snagged more than two dozen major Wall
Street accounts over the past three years due to this
fact alone. "Clients increasingly want more rational
fees," says Mr. Scherl. "They want better
value."
Crain's
New York Business, October 29, 2006
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