Am Law Second Hundred: Steady Does It
Aric Press and John O'Connor
Lawyers like to lament the passing of their fabled past, the age when the partners knew each other on sight, when firms contented themselves to operating in one Zip code, when junior associates were not some menacing anonymous horde threatening to take out their frustrations via the blogosphere.
Actually, in the world of the big firms, those days aren't gone, they've just moved to the Am Law Second Hundred. By any reasonable standard, which is to say any standard except the performance of their big brothers and sisters in the Am Law 100, these firms are large, prosperous and growing steadily. As a group they are still smaller than the Am Law 100 firms of a decade ago and retain the possibility of old-fashioned cohesion. Here are some useful comparisons:
The average Second Hundred firm has 289 lawyers, 92 equity partners, gross revenue of $170 million, revenue per lawyer of about $589,000, and profits per partner of $666,000.
The average Am Law 100 firm has 778 lawyers, 183 equity partners, gross revenue of $645 million, revenue per lawyer of about $828,000 and profits per partner of $1.315 million.
Averages can deceive. On the RPL tables, 28 of the Second Hundred rank in the top 100; six in the top 25. Similarly on the PPP tables, 28 of the Second Hundred rank in the top 100; four in the top 25. These financially elite operations tend to live in niches -- litigation or intellectual property (Irell & Manella, Munger Tolles & Olsen, Williams & Connolly) or in New York (Boies Schiller, Kasowitz Benson, Patterson Belknap, Hughes Hubbard.)
What sets the two groups apart overall is growth and leverage. Since 1998, the Am Law 100 firms grew by 67 percent; the Second Hundred by 32 percent. Leverage (the ratio of lawyers to equity partners) at the Am Law 100 increased from 2.27:1 to 3.25:1. In the Second Hundred, leverage has always trailed, averaging 1.63:1 in 1998 and only 2.13:1 last year. Those leverage numbers would be even lower in the Second Hundred but for a handful of firms with aggressive ratios that exceed even the Am Law 100 firms. For example, Gordon and Rees of San Francisco clocks in at 11.7:1 and Boies Schiller at 7.6:1.
The remarkable news for all the firms has been the remarkable growth in legal spending in the U.S. and around the world. In 1998, the gross revenues of the Am Law 200 were $31.2 billion. Last year gross had grown to almost $81.5 billion, an astonishing increase of 161 percent. During that same period overall head count grew by 56 percent and RPL by 67 percent. The market share of the Am Law 100 increased as well, from 74 percent to 79 percent.
One area that both groups have in common has been a reluctance to increase the size of the equity partnership. Since 1998, the Am Law 100 has increased its EPs by almost 29 percent, the Am Law 200 by just 10 percent. Non-equity partnerships have bloomed. In the Am Law 100, they grew by nearly 300 percent; in the Am Law 200 by over 150 percent. Year over year, the picture is no brighter for the ambitious. Of all 200 firms, 79 shrunk or held flat their equity ranks; another 21 increased them by one or two.
The challenges facing the Second Hundred are familiar. They can be defined as their talent and their clients. For the talent, they fall into two areas, recruitment and retention. On the former, given their locations and rates, many can not compete for the high-priced talent coming out of law school. Many have now opted for a first bounce strategy -- come to us after you've had your fill of New York hours -- or recruiting the best students from local law schools. On the latter, the problem is not so much the associates as the partners. Those with portable and, to use the cliche, scalable business, can usually earn more in other, more prosperous firms. Holding them can be a strain on a firm's social system.
For clients, the question is whether the Second Hundred firms will be big enough or able enough to attract the best paying work. Some clearly are. They more than hold their own in competitions for business with firms whose marketing departments are bigger than their partnerships. But that requires a good deal of discipline and focus: for subject matter, geography and rates. Firms start down the lawyers' trail of tears when they wander from that path.
Discipline can be difficult to find when firms decide that their health requires a merger. It is worth noting that none of the Am Law 200 firms with top-shelf RPL or PPP are products of mergers. It is possible to catapult onto the Am Law 100 by combining two Am Law Second Hundred firms. Such combinations seem to occur regularly. In truth, though, they haven't gone far. You can find them hovering in the bottom quarter of the Am Law 100 PPP and RPL tables.