Law Firm Survey Shows That Flat Is the New Up

A recent survey reports an almost 5 percent drop in hours billed and a 4 percent drop in revenue last year for the 87 participating Am Law 100 firms. That compared to a steady 4 percent increase in work every year from 2001 to 2007 for large firms. Atlanta firms expected a tough year and budgeted accordingly, after work dried up in the last quarter of 2008 following the September collapse of Lehman Brothers. Of Atlanta's largest 12 firms, only four reported significant revenue increases.

Meredith Hobbs

Daily Report

2010-04-06 12:00:00 AM

Flat is the new up.

That was how L. Gray Geddie Jr., of Ogletree, Deakins, Nash, Smoak & Stewart, summed up 2009 for big law firms.

Geddie, who was the firm's managing partner throughout last year, made the assessment borne out by Citi Private Bank's 2009 survey that reports an almost 5 percent drop in hours billed and a 4 percent drop in revenue last year for the 87 participating Am Law 100 firms. That compared to a steady 4 percent increase in work every year from 2001 to 2007 for large firms.

Atlanta firms expected a tough year and budgeted accordingly, after work dried up in the last quarter of 2008 following the September collapse of Lehman Brothers.

"We were planning for a bleak outlook," said King & Spalding Chairman Robert D. Hays. "For the last three months of 2008 we were like a prizefighter knocked to the ground. We were coming up off the canvas wobbly-kneed."

Sutherland's managing partner, Mark D. Wasserman, said his firm expected work to be down, and it was. "We didn't revise our budget in 2009. We didn't need to," he said.

Of Atlanta's largest 12 firms, only four reported significant revenue increases. Two of those were labor and employment firms, Ogletree Deakins and Fisher & Phillips, whose practices are somewhat counter-cyclical, while another, Troutman Sanders, added a 100-lawyer firm effective Jan. 1. The fourth was King & Spalding.

Even so, half the firms in the Dozen increased profit per partner, ranging from a $208,000 increase at King & Spalding to a $11,353 increase at Smith, Gambrell & Russell.

Firms responded to the dim prognosis for 2009 by cutting costs. All of Atlanta's big general practice firms laid off staff and associates in the first two quarters of the year, as did firms nationally. That was followed by associate pay cuts toward the end of the second quarter that rippled through the third quarter.

"We had to make some extremely difficult choices. I've never had to lay anyone off before," said Troutman Chairman Robert W. Webb Jr.

Firms also reported more mundane belt-tightening, such as renegotiating vendor contracts and cutting back on travel for firm business in favor of videoconferencing.

Some Atlanta firms said they raised rates modestly, but many said they confronted pushback on rates and experienced more trouble collecting their fees.

And most firms reported becoming more aggressive about collecting money from clients to avoid the drop in collections that dragged down revenue and profit for many at the end of 2008 -- with varying degrees of success.

Webb said he told his partners in September that Troutman would not hit its budget number unless they stepped up collection efforts. He said the firm's fourth-quarter collections increased $23 million over the prior year and it reported a more than 13 percent increase in profit per partner, to $670,000.

But at Ford & Harrison, a fall-off in collections derailed the firm's budget. C. Lash Harrison, Ford & Harrison's managing partner, said the firm budgeted for a flat year. If the firm had collected fees at the same rate as the prior year, it would have achieved flatness, he said. Instead, slow-paying and bankrupt clients caused revenue to drop about 7 percent.

"It doesn't matter if you have the work. If you're not getting paid for it, that's a problem," Harrison observed.

Hays said King & Spalding "became more aggressive with the arrangements we have with some of our clients," and even cut loose some underperforming clients.

"We're not interested in all work for all clients," he said. "It's hard for lawyers to get that through their heads."

Cost-cutting allowed some firms to pay partners more than they'd expected, even though revenue declined. Sutherland's revenue dropped 6.8 percent, but the firm's profit per partner increased 9.5 percent, to $910,000. (The firm's equity partnership shrank by six lawyers or 5.5 percent, which helped increase the profit payout.)

King & Spalding paid partners a lot more than anyone expected. Profit per partner shot up almost 17 percent, to $1.4 million. (That followed an almost 12 percent drop in PPEP the previous year.)

King & Spalding was the only firm in the Dozen to post increases in revenue, revenue per lawyer and profit -- despite flat lawyer head count and a loss of only two equity partners.

Hays attributed the firm's good outcome to its ability to secure "more than our share of work" and not cost-cutting.

He said King & Spalding's continuing metamorphosis from a regional firm to one competing with top-priced national and international firms meant it could offer more cost-effective services to companies in the market for such firms. "We're able to compete against the expensive London firms," he explained.

Cost-cutting did not offset a revenue decline at Kilpatrick Stockton, where profit per partner dropped almost 13 percent, to $613,691. The firm's co-managing partner, William E. Dorris, said Kilpatrick budgeted for a revenue decline of 4 percent to 5 percent—but revenue actually dropped 11 percent.

The firm had anticipated that intellectual property and litigation work would increase and make up for declines in corporate and real estate work, as in past recessions, said Dorris.

"It didn't actually rise this time as much as stay flat," he said, adding that litigation and IP work did pick up, but not until later in the year.

Morris, Manning & Martin also budgeted for a drop in demand. Revenue dropped 16 percent. Profit per partner dropped almost 9 percent, to $760,134.

The firm's managing partner, Louise M. Wells, said the numbers came in within the projected range, perhaps slightly better. "There is not a lawyer I have talked to who said their practice was equal in 2009 to what it was in 2008," she said.

"Everyone was holding on to their money," said the firm's executive director Jane Schnetzer. "They weren't doing deals. The market was stunned by the economy."

Morris Manning, which has large real estate and corporate practices, reported that litigation expanded from 32 percent to almost 43 percent of the firm's revenue last year.

The firm had planned to cut associate pay by 15 percent for those in the real estate, lending and tax practices and 10 percent for those in other groups—then ended up cutting pay across the board by 10 percent because "things were picking up," said Schnetzer.

Flat litigation and a big drop in deal work caused Arnall Golden Gregory's revenue to drop 11.5 percent, said firm managing partner Glenn P. Hendrix. Profit per partner was down 11.7 percent. Hendrix said transactional work has picked up and that AGG lawyers' average billable hours-per-day for the first two months of the year are back to October 2008 levels. "The first two months are a very limited sample, obviously. But so far, so good," he said.

Unsurprisingly in a year of widespread layoffs, lawyer head count was down or flat at most of Atlanta's large general practice firms. The only firms that reported notable head count increases, Troutman and Alston & Bird, also made sizeable acquisitions.

Troutman netted 30 lawyers, increasing head count to 650 lawyers, after absorbing the roughly 100-lawyer Ross, Dixon & Bell on Jan. 1, which had offices in Washington, Chicago and California. In 2008, Ross Dixon posted revenue of $56 million and Troutman reported $350.4 million. In a normal year, the Ross Dixon revenue would have boosted Troutman's gross by 16 percent.

Last year the combined firm's revenue increased 7.39 percent—still resulting in a 17 percent increase in profit and a 13 percent bump in profit per partner.

"We were trying to do a merger in what turned out to be the worst economy of our lives," said Webb. "It could have been a disaster adding all those people and all those offices. ... None of that happened," he said, pointing out that a big merger absorbs a lot of nonbillable time.

Alston's acquisition of the 83-lawyer Weston Benshoof Rochefort Rubalcava & MacCuish in Southern California took effect Sept. 1, 2008. That plus the addition of a 11-lawyer Silicon Valley office on Aug. 31 contributed to a 6.6 percent revenue increase in 2008.

But the increase in head count did not show up in the Am Law survey until 2009, because Am Law asks firms to report head count numbers as of Aug. 31.

In 2009, the firm's head count increased by 43 lawyers. However, revenue and profit were flat, while revenue per lawyer decreased 5.5 percent.

"We felt good about the year," said Alston managing partner Richard R. Hays. "It started with a lot of uncertainty."

Managing partners are feeling cautious about 2010, although several reported an uptick in demand for the last quarter of 2009.

"I'm thrilled to see the end of 2009, but I'm not sure anyone knows what 2010 is going to look like," said Stephen M. Forte, the managing partner of Smith, Gambrell & Russell, which posted a flat year.

The credit markets are still locked up, which means no deals. Banks are failing left and right in Georgia, and the foreclosure crisis has hit the commercial real estate market.

"There are numbers out there to defend any position you want to take," Forte pointed out, "but I think there is more confidence in the marketplace. Most feel the worst is behind us."

"The areas that were completely dead, like real estate, cannot be worse, and we're seeing signs that they'll pick up," agreed Webb. "Corporate deals are picking up, primarily in the middle market."

Managing partners for Atlanta's big firms said they were not planning any more layoffs in 2010. That means this year's partner profits will have to come from either an increase in demand or other efficiencies.

At King & Spalding, Hays said the firm was still budgeting for bleak -- despite its strong finish to 2009. "We're not expecting an uptick in the broader economy, and we're not planning for one," he said. "We're planning and managing for a protracted flat economy."

"That said, we take a long-term view, and we have started off 2010, so far, strong. I hope that will continue," he added.

Staff reporters Janet L. Conley, R. Robin McDonald, Alyson M. Palmer and Andy Peters contributed reporting for this story.

See full report:

Daily Report Dozen