Lessons of The Am Law 100: Is the Golden Age Over?

Big firms just finished the best five years since we began our records. Now, head count and salaries outpace revenue and rates
It was fun while it lasted. In 2007, The Am Law 100, the top-grossing law firms in the U.S., finished the best sustained growth spurt since The American Lawyer began tracking firm financials in 1984. For the first time, firms showed five consecutive years of better-than-average growth in revenue per lawyer and profits per partner. This Golden Age for law firms has been fueled by surging demand for high-end legal services and unrelenting rate hikes. But now, there are signs the great run may be over.

Aric Press and John O'Connor

The American Lawyer

2008-04-30 12:00:00 AM
It was fun while it lasted. In 2007, The Am Law 100 -- the top-grossing law firms in the United States -- finished the best sustained growth spurt since The American Lawyer began tracking firm financials in 1984. For the first time, the firms showed five consecutive years of better-than-average growth in both revenue per lawyer, the key measure of law firm financial success, and profits per partner, the metric that has turned law firm managers into contortionists.

How good was this run? Since 2003, average RPL has increased by $205,000. Before that, it took the firms 10 years, from 1992 to 2002, to improve that much. The relative gain in profits was even more impressive. Since 2003, PPP has jumped by $438,000, to an average of $1.3 million. It took The Am Law 100 firms 15 years, from 1987 to 2002, to make a similar gain.

This Law Firm Golden Age has been fueled by surging demand for high-end legal services and unrelenting annual rate hikes. Partners reaped the benefits of hard work -- and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners. Since 2001, the growth in equity partners has been above the 21-year annual average of 3.2 percent only once, in 2003. Last year the average equity partnership grew by 2.6 percent, or almost five partners.

Even in these bountiful times, five was a big number. Thirty-seven firms shrunk their equity partnerships. Four held them flat. And eight increased them by one or two. A handful of firms managed to lose partners and PPP. Notable in that category are Dickstein Shapiro; Heller Ehrman; and Akin Gump (which benefited from a contingency in 2006).

Other highlights from The Am Law 100 report:

Total revenues reached $64.5 billion, an increase of 13.6 percent.
Two firms, Skadden Arps and Latham & Watkins, each hopped over the $2 billion barrier. It took Skadden 51 years to reach the $1 billion gross mark, and eight more to hit $2 billion.
Nineteen firms had profits per partner of $2 million or more, four more than in 2006. Three of the 19 firms each decreased their equity partner ranks by 4 percent last year: Dechert Milbank, and Weil Gotshal. Once again, Wachtell Lipton led the pack, this time with a record-breaking PPP of $4.9 million.
Head count grew by 6.8 percent to 77,816 lawyers. The fastest-growing category was nonequity partners, which now account for 35 percent of all partners. If these growth rates continue, the number of nonequity partners will exceed equity partners by 2015.
The dominance of New York continues. The average RPL of New York firms was $1.1 million, while the average RPL for firms not born in New York was about $780,000, a difference of 41 percent. More dramatically, the average non-New York RPL is now about $15,000 behind where the average New York RPL stood in 2003.

The great run may be over. The sharp decrease in deal activity is well-known. And the classic countercyclical practices -- litigation and bankruptcy -- have not yet lifted all boats. Also, there is a structural indicator that points to weakness. For the first time since the bust of 2001, the growth in head count noticeably exceeded the growth in RPL (in 2002, the two metrics essentially tied.) Coupled to the body count was the much brooded-about associate salary increases last year. Many consultants argue that those costs will be fully felt this year, precisely when demand for high-priced legal help may fall.

Averages and year-to-year comparisons can often prove misleading. To add a little perspective, we ran a series of 10-year trend lines for the big firms. We found that some firms ended more or less where they started. But the story for 59 of The Am Law 100 firms in 1998 was more turbulent. Twelve died or disappeared into mergers. Twenty improved their RPL rank by double digits, while 15 dropped by double digits. Seven moved from the bottom half of the list to the top; five dropped from the top half to the bottom. And three firms that were not on the 1998 list -- Quinn Emanuel, the litigation wunderkind; Finnegan Henderson, the IP specialty shop; and Fish & Richardson, an IP and litigation house that scored a big contingency in 2007 -- placed in the top 30.

The biggest upward movers: Dechert (up 35 places), Akin Gump (up 34), and DLA Piper (up 31). The biggest losers: Chadbourne (down 44 spots), and Dewey Ballantine, King & Spalding and White & Case (all down 20).

We hope you weren't working so hard that you didn't enjoy the best seasons of your careers.

[Note: For a complete list of the 10-year rankings, please go to AmericanLawyer.com.]

RELATED INFORMATION:

AM LAW 100 CHARTS:

Measuring the Efficiency Factor

Two Firms Pass the $2 Billion Mark

Revenue Rises -- Slowly

Wachtell Heads the Value Rankings (Again)

RPL Ranks 1998-2007

A Guide to our Methodology

RELATED ARTICLES:

For more of the latest findings on the Am Law 100 firms, see the related series of American Lawyer reports, "THE AM LAW 100 2008: Behind the Numbers: Noteworthy trends and newsmaking firms in this year's Am Law 100."