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September 9, 2010 |
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| November 12, 2007 |
By: Forrest Norman
Research Vala Issa |
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ncreased associate salaries and more requests from clients for alternate fee arrangements are putting the financial squeeze on managing partners at South Florida law firms.
A year after many firms raised associate salaries as part of a national wave of pay increases, the vast majority of managing partners who responded to the Daily Business Review’s third annual Managing Partners Survey said they expect more pay hikes.
Some 85 percent said they expected to increase associate salaries again. Thirty-nine percent of respondents said attorney and staff compensation has comprised the most significant increase in firm expenses. Another 12 percent said employee benefit costs represented the largest increase in expenses.
“You don’t have to look very hard to see what kind of effect increased associate salaries have on profitability, but you also don’t have to look very hard to see what has been happening across the board with respect to associate salaries,” said Gregory Young, partner-in-charge at the West Palm Beach office of Edwards Angell Palmer and Dodge. “The salaries have gone up, and the resulting financial pressure is inevitable.”
Rising living costs in South Florida have added to the pressure to raise salaries, making book-balancing a little harder.
“Associate salaries and salaries in general are the biggest expenses you have,” said Frank Sheppard, managing partner of Rumberger Kirk and Caldwell, which maintains a Miami office. “But you have to stay competitive with salaries for associates and for staff as well.”
The California-based placement firm Robert Half Legal released a study in October predicting that starting salaries for legal professionals would increase by an average of 4.2 percent in 2008.
Charles Volkert, executive director of Robert Half Legal, said firms will have to raise salaries for all levels of attorneys and staff over the next year in order to stay competitive.
“If you want top-tier talent, you have to have a good starting salary for associates, but it doesn’t stop there,” Volkert said. “As the economy changes, firms in Florida have to offer competitive salaries to experienced attorneys that can do closing and foreclosure work, as well as bankruptcy attorneys. We’re also seeing increased demand and a concurrent rise in salaries for litigators, IP attorneys and corporate governance attorneys.”
Firms — especially larger firms — invest a lot of money in recruiting and training first-year associates, but tougher economic times don’t mean that the upfront investment in top talent is likely to slow down, Volkert said.
“People don’t stay at firms for 25 or 30 years like they did in the past, and firms know that,” he said. “But I’ve talked with managing partners who say it’s still worth the expense just to attract and retain a percentage of those associates, who will go on to become partners.”
Michael J. McKenney, Citi Private Bank Law Group’s director of structured lending for Southeastern-based law firms, said Florida firms are still experiencing revenue increases, but higher associate salaries are affecting profitability.
Firms are trying to offer salaries that are competitive with New York, McKenney said.
“By offering these salaries, firms are able to lure associates out of the New York market, where perhaps they may not have the same level of exposure to the more interesting work,” he said. “If they go to a Florida firm, they’re having a higher level of contact with that work, and they’re not required to put in the same hours.” Those additional costs often get passed along to clients. But a stagnant economy has clients increasingly looking to tame or at the very least make their legal expenses more predictable. Sixty-nine percent of survey respondents told the Daily Business Review that clients made more requests for discounts, risk-sharing arrangements and requests to bill by the job rather than the hour than they had in the past year.
That was a significant increase over last year’s survey when only 48 percent of respondents reported an increase in those requests.
Economic concerns were inevitable, as South Florida’s well-documented condo boom finally went bust in the past year, along with an overall slowdown in the residential real estate market locally and nationally. The real estate recession is already having an impact in other sectors.
Managing partners at larger firms were not as hard hit by a downturn in the local and national economy as those at smaller firms. While 29 percent of small-firm managing partners reported being only somewhat optimistic or uncertain about the upcoming year for their firm, only 15 percent of large-firm managing partners reported guarded optimism, and none said they were uncertain. The remaining 85 percent of large-firm respondents said they were optimistic about the next year.
“One of the benefits of being in a large firm is that those firms usually don’t put all their eggs in one basket,” said Peter Prieto, executive partner at Holland & Knight’s Miami office. “We’re able to shift things around to cover the areas that are most profitable at a given time. The [real estate] boom slows down and litigation picks up.”
Firms with that kind of flexibility haven’t seen their fortunes rise and fall with the residential real estate market.
“All firms are not being affected the same,” McKenney said. “Some firms will be able to sustain their level of activity by converting real estate and corporate work into restructuring work. That seems to be kind of the counterbalance to the go-go times.”
Firms with clients affected by the real estate downturn are shifting their focus. Miami firm Bilzin Sumberg, for instance, counts developer Lennar among its biggest clients. The Miami-based development juggernaut announced a 44 percent revenue decrease in September and laid off 35 percent of its work force to reduce overhead.
Bilzin Sumberg Baena Price & Axelrod, responding to changes in the real estate market, recently announced a new emphasis on restructuring.
Managing partner John Sumberg insists his firm can ride out the bumps in the road without having to downsize, despite recent layoffs of five staff members.
“Today, while most condos are dead, a lot of the other areas in real estate are hot,” Sumberg said. “Office marina, industrial, retail, there is movement in these areas.”
Another silver lining in the clouds gathered over South Florida’s forest of construction cranes is that, for lawyers, a bust can mean as much business as a boom. While members of the condo development food chain declare bankruptcy and file suit against one another — all of which provides fodder for the legal community — condo vultures circle, looking for deals and attorneys who can help make them happen.
“There is an enormous amount of action by investors coming in and buying property and unsold inventory at a discount, hoping to ride it out so that when the market turns around, they can resell,” Sumberg said.
The condo carnage — and the overall slippage of the national economy — will create other work for local law firms.
“I think we’re going to start seeing a lot of layoffs, particularly in the mortgage industry,” said Mark Zelek, managing partner in the Miami office of Morgan Lewis. “We haven’t seen the lawsuits yet, but I think we will.” For an attorney like Zelek, whose office specializes in labor and employment law, an increase in labor litigation will mean more business.
Other practice areas that managing partners expect to see growing in South Florida include litigation, which 39 percent of respondents expected to grow in the next year, and bankruptcy, which 26 percent expected to grow.
Managing partners have more global strategic concerns, as well.
Cesar Alvarez, CEO of Miami-based Greenberg Traurig, said he worries as much about complacency and bureaucracy as he does about the changing financial landscape.
“Things have been good for some firms over the last several years,” Alvarez said. “But my concern is that you can become a successful lawyer, and suddenly when that client calls you at five o’clock on Friday and says he needs to meet with you on Saturday, you say ‘What are you doing, I’m an important lawyer?’ ”
Alvarez said he tries to keep Greenberg service-oriented because “there are always other attorneys and other firms out there who are perfectly happy to meet with that client at any time of day, any day of the week.”
He is also concerned with the kind of bureaucratic attitude than can spread in large, successful law firms.
“Bureaucracy kills creativity, and it kills entrepreneurship,” Alvarez said. “It’s the inability to examine yourself or your organization, and the inability to change or be flexible. It’s when an attorney refuses a request from a client and says, ‘We can’t do that because we’ve done it a certain way for all these years.’ ”
For managing partners at some firms, the biggest challenge is simply following the boom years with similar success. “We have had a fantastic run over the last three years,” Prieto said. “The biggest challenge I face is to maintain that level of success.”
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