Profits vs. Partners

Some of this legal lucre trickles down to associates—the young lawyers who are employees of the firms, working long hours on often mind-numbing tasks, in the hope of someday making partner. Salaries for first-year associates, fresh out of law school, were raised earlier this year to $160,000. Senior associates, about to be considered for partnership (generally 8 to 10 years out of law school), earn just under $300,000—before bonus. (Bonuses at the big firms tend to be less jaw-dropping than at investment banks, in the range of $50,000 for a midlevel associate.)

“Firms in New York do better than everyone else,” said Ward Bower of Altman Weil, a law-firm consulting firm. “Deal flow has been great, with record numbers of mergers and acquisitions. Almost all of that work goes to New York firms.”

It’s not just merger mania fueling those Saturday afternoon shopping trips to BMW of Manhattan. Other hot legal practice areas include capital markets, patent litigation, and hedge fund and private equity work (like the recent public offering of the Blackstone Group, which could usher in a wave of private equity IPOs).

So what does a partner at Cravath, Swaine & Moore need to fret about—aside from whether to buy a summer place in the Hamptons or Litchfield County?

Well, nothing, except the future.

Indeed, however profitable they might be right now, law firms are finding they must focus on the bottom line to stay on top of a rapidly changing market for legal services. As a senior partner at a national law firm said, “It’s like we’ve been hit by an asteroid, and soon all the dinosaurs will be gone.”

 

MUCH OF THE DRAMATIC GROWTH in law firm profits over the past few years can be chalked up to rate increases: charging clients more for each hour of a lawyer’s time. “Legal problems are more complex, and companies are more nervous about them,” said a senior in-house lawyer at a Fortune 500 media company. As a result, large companies like his have been willing to pay increasingly large fees to outside law firms, to handle matters that the companies’ own internal lawyers, or in-house counsel, can’t deal with on their own. But now clients are turning cost-conscious.

“Clients are becoming more sophisticated,” said Mr. Zeughauser. “They’re not going to send all of their work to the high-rate firms. They’re only going to send their most important work.” More routine matters will be handled in-house, or sent to less expensive law firms. (Hello, New Jersey!)

When clients do award work to top-shelf firms, they’re driving harder bargains. “Clients are reconsolidating legal work in a smaller number of firms, so they can manage it more effectively,” said Mr. Bower. “They use leverage over the firms which benefit from the reconsolidation to control fees and rates.”