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It should come as no surprise to anyone that the most recent wave of associate salary increases have helped to erode law firm profit margins. Whether the wave begins in west coast technology firms, or east coast financial capital firms, its effects are felt beyond big law in the mid-size and regional firms headquartered in the mid-west and southeast. And, with 80% of law firm expense tied up in compensation and occupancy, the impact can be devastating. What is more surprising is the response of law firm leaders in this new economic environment. Reactions run the gamut from slash and burn tactics to taking it on the chin and silently watching margins erode. Formulating a balanced strategy and resisting the urge for an emotional response is critical. Consider the following.

First, is increasing associate salaries is an appropriate response to increased competition for the best talent in your market or just a follow the leader reaction?   Associate salary increases typically begin in markets where competition is fierce for not only attracting the best talent, but also keeping that talent as the reality of billable hours requirements hits home.   Increasingly, associates are not willing to trade work life balance for a big paycheck. This attitude is not pigeonholed in the bottom half of the law school classes, but pervades throughout. Are there other work life benefits your firm can offer to entice top talent? 

Secondly, recent surveys suggest the demand for legal services have declined in the first two quarters of 2008, and making sure your lawyers are properly utilized is essential to maintaining profitability. As margins become slimmer, there is no room for unproductive associates taking up space. But are associates really the problem? Most associates have little control over the projects they are assigned and virtually no ability to generate new business. They, like everyone else in the firm, rely on the rainmakers to generate enough billable hours to support the business. Before taking a defensive posture and eliminating positions, look for ways to improve your business development efforts. Are you effectively cross-selling your services to existing clients? Do you place enough emphasis on developing new business and in the right sectors?

Lastly, in today’s competitive marketplace, passing increased costs on to your clients is rarely an option. Even in big law, where clients were thought to be less price sensitive, general counsels are scoffing at increased rates as a result of higher associate salaries. Can you blame them? That doesn’t mean you have lost the ability to control your average rates.   The next time someone asks you for an alternative billing arrangement, consider the request an opportunity to control your own destiny. Look for ways to strengthen the value proposition, improve practice management at the matter level, and increase leverage.

Can you avoid the impact of associate salary increases? Not likely. But focusing on the positive economic aspects of your business, rather than going on the defensive, may help you roll through the downturn and leave you prepared for the eventual upswing.

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