“There is a real generation gap between those around 35 and those around 45,” a 33-year-old partner at a major national law firm said recently. “Older people still have this weird idea that this is a partnership and we’re in professional services, yakkety yak and blah blah blah. I don’t see how they think that would pay for this 47-story glass building that we’re in. Younger people see this as a business. I see myself as a midlevel director in a billion-dollar corporation.”

Another partner in his 30’s, at one of New York’s top firms, agreed—but with more anxiety than enthusiasm.

“We’re supposed to care about Aristotle and Plato, and they’re supposed to care about Mammon,” he said, comparing lawyers to finance types. “But now we lawyers care about money.”

“There’s no question that law firms are becoming more like businesses,” said Peter Zeughauser of the Zeughauser Group, a legal consulting firm. “The trend has been around for a good 25 years, but it has accelerated. The competitive pressures have increased dramatically over the last 5 to 10 years. This forces firms to become more businesslike in running themselves.”

One can argue over whether it’s a good or bad thing, and one can also argue about how long it has been going on. But most observers agree that large law firms are becoming more business-oriented, more focused on efficiency and profits—in short, more like investment banks, hedge funds and other money-making machines.

It’s a noteworthy shift for the legal profession, whose denizens like to think of themselves as intellectual types—and view their Wall Street cousins as money-obsessed philistines. Many angst-filled attorneys suspect they should have gone into something more tweedy and creative than relocating commas within merger agreements. As Clarence Darrow said, “Inside every lawyer is the wreck of a poet.”

Such questions of professional identity aren’t just theoretical; they have ramifications for law firms as businesses. If law firms become “just like banks,” but with smaller paychecks, firms may lose their appeal to the talent they must attract in order to thrive.

“The law firms in this culture place so much emphasis on compensation,” said the young partner in New York, who insisted on anonymity, like many of the lawyers contacted for this story, because of firm policies against talking to the press. “But if you end up putting money as the aspiration, inevitably money takes on a power that can transcend the greatness of the craft that you’re learning. When money is what motivates, and money is offered in a higher quantity, people will take the money.”

Not unlike the Mafia, Big Law—the moniker used, with a mixture of respect and resentment, to refer collectively to large law firms—must ask itself, What is this thing of ours? Is the American law firm still a professional partnership servicing clients, or is it just another vehicle to a seven-figure income, but with “LLP” instead of “Inc.” at the end?

“This has been historically the most profitable period for large law firms,” said Brad Hildebrandt of Hildebrandt International, a law-firm consulting firm. The nation’s 100 top-grossing firms as ranked by The American Lawyer magazine are more profitable than ever. In 2006, the average profit per partner was $1.2 million; at New York’s top ten shops, it was $2.67 million (see chart below).

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.”

Getting billed by the hour can be expensive for clients, who get stuck with an unexpectedly big tab if a matter turns out to be unexpectedly time-consuming. Alternatives to the billable hour are gradually emerging, such as flat fees for handling a matter from start to finish; percentage fees, in which the firm’s fee represents a cut of the total amount involved in the matter; and discounted billing rates, if the company sends the law firm a large volume of work.

The upshot: law firms are finding it increasingly difficult to treat clients as gravy trains.

As clients become more hostile to fee increases, law firms are responding by focusing on so-called “premium,” “high-value,” or “rate-insensitive” work—matters that the client will pay a king’s ransom for, without complaint.

Such work doesn’t grow on trees. It grows on business-generating partners—the rainmakers. So firms are increasingly preying upon one another for superstar lawyers, who have cases and clients, or “books of business,” that they take from firm to firm.

“There’s a tremendous amount of movement [by partners] between law firms. The competition for senior talent is very high,” said Mr. Hildebrandt. “You used to go to a law firm and you’d stay for life. That’s just not the case any more. Lawyers change jobs in the way that businesspeople change jobs.”

Statistics bear this out. Every year, The American Lawyer reports how many partners at the 200 largest law firms jumped from one firm to another. In recent years, the total number of such lateral partner moves has consistently been north of 2,000 a year.

If a firm wants to lure top rainmakers, it needs robust profits per partner. “PPP is the closest thing we have to share price,” said one young partner at a national firm. “It’s the best way to signal to lateral partners that your firm is financially strong and has upside potential.”

There are two ways for a firm to increase its profits per partner: It can grow its profits or reduce its partnership. Several prominent firms have picked the latter option. They can effectively fire underperforming partners, by “counseling” them to go elsewhere. Firms can also “de-equitize” laggard lawyers—demoting them to the status of non-equity partner, so they retain the title of “partner” (good for cocktail parties), but without sharing in the firm’s profits.

This process of “de-equitization” was once highly unusual and quasi-scandalous, given the traditional understanding of law firm partnership. “Making partner was like becoming member of a fraternity,” said Mr. Bower. “You couldn’t be kicked out of the fraternity unless you killed another member. Now there’s no tenure. It’s ‘What have you done for me lately?’; it’s ‘Eat what you kill.’”

Although de-equitization has yet to take hold among the most elite Gotham shops, it is being adopted by national firms with sizable New York offices. Several months ago, Mayer, Brown, Rowe & Maw, a national firm headquartered in Chicago, used it to get rid of 45 partners. One of its Chicago rivals, Jenner & Block, plans to de-equitize 15 to 20 partners by the end of 2007.

Times have changed from the days when, once you made partner, you were guaranteed a lucrative job for life—and might even get home in time for dinner while the associates stayed late at work. “Today, partners work harder than associates,” said Mr. Zeughauser. “The demands of partnership are immense, in terms of developing business and helping run the firm.”

As a result, partnership doesn’t have the same allure it once did, despite being more lucrative than ever. Law firms arguably have taken some of the traditional perks of partnership—job security, collegiality, work-life balance—and traded them in for more pieces of silver.

“The super-prize of partnership isn’t so super anymore,” said Marc Galanter, a law professor at the University of Wisconsin and coauthor of Tournament of Lawyers: The Transformation of the Big Law Firm. “You never get to a point of repose. There’s always this competition going on.”

A former associate at a large firm, now at a media company, put it bluntly: “I would look at the partners and they were all overweight, on their second or third wives, heart attacks waiting to happen. I would think, ‘Is this what I get in the end?’”

IF ASSCOIATES ARE NO LONGER as interested in partnership, this naturally poses a problem for law firms. Firms make their money by providing professional services. Attracting and retaining the very best professionals, from senior partners on down to first-year associates, is critical to their success.

“Every law firm is a seller in the market for legal services and a buyer in the market for legal talent,” said Mr. Bower. “Ultimately, all they have to sell is what they’re able to buy.”

These days hiring and retaining lawyers is the greatest challenge for firms, according to several law firm partners and industry consultants.

“Our biggest problems are supply side,” said one partner at a national firm. “We need to attract and retain people who can do great work.”

American law schools churn out roughly 40,000 graduates a year, a number that hasn’t budged much in the past 10 years. Strong demand for new associates, combined with static supply, is driving up the price of talent.

Associate starting salaries have been climbing fast. In January, Simpson Thacher led the latest round of pay raises, which took starting salaries from $145,000 to $160,000. That came less than a year after the previous raise, led by Sullivan & Cromwell’s move from $125,000 to $145,000. In both cases, everyone quickly followed the leader.

But given firms’ seemingly insatiable demand for new recruits, expect more raises in the not-too-distant future. Peter Zeughauser believes the next raise will be to $200,000 and could take place “as early as within the next six months. On the outside, 12 to 18 months. And a move to $250,000 after that.”

The need for firms to ante up more money stems in part from the less stable nature of partnership. “As the odds of getting the prize [of partnership] go down, and the prize itself is somewhat compromised by the fact that partnership now comes without the real guarantee of tenure, the present value of the prize goes down,” said Professor Galanter. “Then people say, ‘O.K., if I’m not getting this big prize, I want more cash now.’ And that’s exactly what we’re seeing.”

Recent law school graduates, many of whom carry debt into the six figures, generally rejoice at higher salaries. But this may be a case of “be careful what you wish for.” According to Arnold & Porter partner James Sandman, former president of the bar in Washington, D.C., (where top firms recently raised associate salaries to match those of New York): “There is no free lunch. Higher salaries inevitably mean higher billable-hour expectations and even less work–life balance.”

Thus it remains to be seen if the pay raises will address “associate attrition”—young lawyers departing prematurely, after firms have invested in their training and development, but before the years in which they’d be most profitable for the firms.

According to Irene Dorzback, assistant dean in the Office of Career Services at New York University School of Law, firms “believe that the way to retain [associates] is to increase the salaries. But the thing that associates are looking for more than anything else is work-life balance.”

In fact, increasing salaries may actually lead associates to leave firms sooner rather than later. Said Ms. Dorzback: “Students come into the office after each pay raise and ask, ‘Can you help me reassess my debt? How long do I have to stay [at a firm] now?’”

“They’re throwing more and more money at 26-year-old graduates, and people are still leaving law firms in droves,” said Melissa Lafsky, an ex-associate and author of the Opinionistas blog, in which she chronicled the more depressing realities of law firm life. “People still leave, and they still hate it.”

When confronted with the question of what makes law firm practice attractive these days, partners start sounding like high school guidance counselors. They respond to the question with a question: Well, what are your goals?

“You have to ultimately make the decision about what you want in life,” said Morton A. Pierce, cochairman of Dewey Ballantine. “If you want to make $100 million potentially in a year, you’re not going to make that in a law firm. Certainly it’s no secret that hedge fund people make more. You have to ask yourself what your goals are.”

Fair enough. But aside from paying off their student loans, what do young lawyers aspire to? Nobody seems to know anymore. “The Gen Y people don’t really have the same desires and goals as previous generations,” said a managing partner at one prominent firm. “I think they don’t get the same fulfillment out of this.”

A partner at a rival firm is more sanguine: “What firms can and should offer people is the ability to take part in the craft, teach them how to be great lawyers, make them understand that life is about much more than money. You can contribute to society as a lawyer in ways that other people aren’t trained or licensed to do.”

“Law is an attractive, challenging profession,” said Mr. Zeughauser. “Some people enjoy the challenge, and there’s also a service aspect that some people enjoy. There are people who like being in the service profession, and the law is probably the highest-earning service profession.” (It sure beats the green aprons off Starbucks.)

For the moment, Big Law shops are still thriving, bright young people still troop off to law school and Davis Polk partners continue to buy boats. And some claim the tension between the economic and professional aspects of legal practice is being exaggerated.

“You’re going to find people who are going to tell you this is becoming a business and more cutthroat, but my view is—and I may be in the minority here—people have been focused on this as a business for as long as I can remember,” said Dewey Ballantine’s Mr. Pierce. A focus on profits has existed “as long as The American Lawyer has been around,” he added. Several industry observers assert that after the influential trade publication started ranking law firms by revenues and profits, firms become obsessed with climbing the totem pole, like college deans fixated on U.S. News & World Report rankings.

So is it all The American Lawyer’s fault? Said the publication’s current editor-in-chief, Aric Press, “I harbor deep doubts that our magazine introduced the idea of greed into a previously Edenic profession.”

—with additional reporting by Tom Denison, Oliver Haydock, Julia Heming, Alex Jacobs, Vince Levy, Andrew Mangino, Nora Marie Matson, Dotty McLeod, Edon Ophir, and Sarah Sabshon