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Reports of their demise, it turns out, were premature. For years, the regional firms that constitute much of the Second Hundred were told that they were exactly the wrong size: too big to compete with the narrow focus of boutiques and too small to match The Am Law 100's national footprints and marquee names. But last year, as the financial sector began its meltdown, the Second Hundred's slow-growth strategies were vindicated.
While average revenue per lawyer at The Am Law 100 decreased by 1.2 percent in 2008 (the first decline since 1991), Second Hundred firms were essentially flat. And when the Second Hundred's national firms, as well as those in the nation's biggest money centers -- Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C.-- are left out of the calculations, average RPL growth was 1 percent. In all, 49 Second Hundred firms posted increases in RPL, compared to 42 Am Law 100 firms.
What's more, the firms that outperformed were the ones that pointedly ignored The Am Law 100's usual recipe for growth -- relentless focus on the most lucrative markets, practices and clients. This time around, it was Second Hundred firms based in middle markets that showed the most growth. Milwaukee's Second Hundred firms increased their revenue per lawyer by an average of 3.2 percent. Indianapolis's and Kansas City, Missouri's showed average RPL gains of 3.1 percent and 7.9 percent, respectively. Snell & Wilmer, the only Phoenix firm with a multiyear presence in The Am Law 200 (a second firm, Lewis and Roca, was added this year), increased its RPL by 8.6 percent.
Firms in these markets increased their profits per partner by an average of 1.5 percent to 6.4 percent, compared to an average decline of 2.6 percent for the Second Hundred as a whole and 4.3 percent for The Am Law 100.
These overachievers ignored the conventional wisdom: They held on to less-profitable practices; they worked with clients on matters far removed from the Wall Street money machine; and they contented themselves with fees that were a fraction of their East Coast and national siblings.
Practice diversity was the key to success last year, but we're not just talking about the requisite balance of corporate, restructuring and litigation matters. For many Second Hundred firms, labor and employment, trusts and estates, and environmental practices significantly boosted revenue. Kansas City's Lathrop & Gage increased its RPL by 7.8 percent, in part because of an employment law practice that increased its hours by almost 6 percent and a trusts and estates practice that grew more than 10 percent, says chief executive officer Joel Voran. Those practices, along with equally strong increases in tort and IP litigation groups, bolstered the firm's performance in a year when its real estate practice was flat and its corporate practice was down about 1 percent, he says.
Some of the biggest gains in RPL occurred at regional firms that completely bucked the trend toward specialization and pruning all but the most profitable practices. "[Legal consultant Peter] Zeughauser would say, 'Figure out what practice groups are the most profitable [and] distinguish yourself,' but we didn't do that," says Snell & Wilmer chairman John Bouma. "We kept what we needed to serve our clients." Snell & Wilmer has more than 40 different practice areas, and increased its RPL by 8.6 percent in 2008. (Zeughauser, a contributing editor of The American Lawyer, remains unpersuaded: "This year is not going to be what the future looks like," he says. "It is much smarter to build breadth and depth and knowledge in a few countercyclical areas than to think you can be on the shortlist for everything; the market increasingly rejects that model.")
Still, some of the Second Hundred's steepest falls came at firms with a narrow focus. At New York immigration shop Fragomen, Del Rey, Bernsen & Loewy, RPL dropped 15.2 percent, and at Silicon Valley tech specialist Fenwick & West, it fell 11.0 percent. Both firms increased head count dramatically -- 23 percent at Fragomen and 21 percent at Fenwick -- only to see demand dry up. (Fragomen's blue-chip clients slowed their overseas hiring, and Fenwick's licensing and IPO businesses froze.)
Some corporate practices showed growth, though, provided their focus was far removed from Wall Street and the Fortune 500. Ice Miller, which increased its revenue per lawyer by 7.8 percent, didn't see any drop in corporate work last year, says chief managing partner Byron Myers. The Indianapolis firm stayed busy with M&A and financing matters for clients ranging from an Indiana-based Internet consumer reporting company to a Michigan-based outpatient surgery center. Kansas City's Stinson Morrison Hecker increased RPL by 17.0 percent, in part because of its strong banking practice, says managing partner Mark Foster. The firm has been involved in acquisitions of 10 of the 54 banks that have failed since the beginning of 2008, including representing Mutual of Omaha Bank when it acquired the deposits of First National Bank of Nevada Inc. and First Heritage Bank last September.
Zeughauser notes that work traditionally moves to lower-priced firms in a recession, to the benefit of the Second Hundred. As clients began to frantically cut costs in late 2008, many regional firms could tout fees that were 25 percent to 50 percent lower than those of top New York firms. That differential was often a game-changer. Milwaukee's Quarles & Brady says its lower rate structure has provided an entree to expanded work with several clients over the last 18 months. The firm had six or seven clients who increased demand by more than $1 million in 2008, and another 15 or 20 who increased it by $500,000, says managing partner Frederick Lautz. The additional work contributed to an RPL increase of 6.2 percent last year. Newark's Sills Cummis & Gross says its rates, which are about 25 percent lower than those at New York firms, helped to boost its revenue per lawyer by 5.7 percent last year. "There's no doubt the market is working in our favor now," says managing partner R. Max Crane.
Of course, the relative success of a group of Second Hundred firms in one year is not to be overblown. With a total of $17.3 billion in gross revenue, average revenue per lawyer of $587,369, and average profits per partner of $648,652, the Second Hundred firms still lag behind their Am Law 100 peers. But the dismal economy continues to play to the regional players' strengths, making them strong candidates for continued growth in 2009. One thing is for sure: It would be foolish to write their eulogies.
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