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Recession Strikes Harder at N.J. Top 40 Second-Tier Firms
New Jersey Law Journal
Just as New Jersey's Top 20 firms took it on the chin last year, their colleagues in the next tier felt the effects of the Great Recession -- and worse so.
The second-tier firms showed a 9 percent drop in gross revenues and a 2.4 decline in net profits in 2009.
Together, they grossed $496.1 million, down from $546 million in 2008, and netted $168.6 million, compared with $172.7 million the prior year.
They also went into retrenchment, dropping their attorney ranks by 3.8 percent.
Revenue per lawyer dropped by 5.5 percent and profits per equity partner by 4.4 percent, which shadowed the declines in gross and net.
It marked the second straight year of decline in the lower half of the Top 40 firms, whose financials the New Jersey Law Journal began studying four years ago.
By comparison, the Top 20's slide, reported May 3, was barely noticeable. The first-tier firms grossed $1.56 billion, down 2.65 percent from $1.59 billion in 2008, and netted $528.6 million, down 0.6 percent from $531.9 million.
The silver lining for the second tier, if any, was a 2 percent bump in equity partners and an 11 percent rise in nonequity partners. Though the raw numbers were meager (eight equity partners, 14 nonequity partners), opening the books to new partners usually signals optimism about future growth.
The declining numbers are in part due to a change in the cast of the lower 20. The Newark office of Greenberg Traurig vaulted into the Top 20 this year with $46.65 million in gross revenue, and was replaced in the second tier by DeCotiis, FitzPatrick & Cole in Teaneck at $39 million. That removed nearly $7 million from the second tier's total gross. [Note: At the time of our May 3 Top 20 report, we had not confirmed Greenberg Traurig's financials, so they did not appear in the Top 20 chart.]
Another factor to reckon is that five of the second-tier firms are not firms unto themselves but New Jersey profit centers for national or regional firms based elsewhere, which established footholds in New Jersey a few years ago and have blossomed into operations that rival or dwarf many local firms.
Rounding out the lower tier are out-of-state transplants Marshall, Dennehey, Warner, Coleman & Goggin of Philadelphia (23rd), with revenues of $32.65 million; Reed Smith of Pittsburgh (24th), $30.1 million; K&L Gates of Pittsburgh and Seattle (32nd), $24.6 million; Philadelphia's Ballard Spahr Andrews & Ingersoll (38th), $16.9 million; and New York's Proskauer Rose (39th), $16.7 million.
The survey includes only revenues and profits related to the out-of-state firms' New Jersey operations, where billing rates and profit margins may be lower and thus produce figures different from those firms' national numbers. Still, those five firms accounted for $121 million in revenues and $40.5 million in profits, which in each category was about one-fourth of the total.
After DeCotiis FitzPatrick, the second-tier firm with the highest revenues was Lerner, David, Littenberg, Krumholz & Mentlik of Westfield, which again placed 22nd, despite a slight drop in revenue to $36.65 million from $37.48 million. The firm is unique in the survey in that it is wholly devoted to intellectual property law, which produces proportionately higher billings. Its net profits of $14.66 million were second only to DeCotiis FitzPatrick's $16.9 million.
Compared with 2008, when the second-tier firms were stagnant in numbers of lawyers and equity partners, the drop of 45 in total lawyers in 2009 was palpable. And while the Top 20 firms saw a larger decline in the raw number, 81, the second tier's loss of lawyers was proportionally greater.
Nonequity partnerships continued to be the one stable growth area. Percentage-wise, the second tier's 11 percent growth bested the Top 20's 8.9 percent hike and, in fact, was not much lower than the 12.5 percent increase in NEPs in 2008. It's an indication that compensation schemes are changing and/or that nonequity partners are being made as equity partners retire or leave. Either way, NEP growth will likely continue to outpace that of equity partners, especially in recessionary times, because they can be billed out at higher rates than associates but get paid less than full partners.
The 5.4 percent drop in revenue per lawyer (RPL) -- to $435,200 from $460,700 -- was worse than the 3 percent decline reported last year. And last year's decline was the first since the Top 40 survey began.
Average RPL at the second-tier firms was 18.8 percent lower than the $535,900 posted by the Top 20 firms this year. That's only slightly higher than the 16.8 percent RPL gap reported last year, which was almost double the 9.6 percent gap the year before.
The average $444,100 in profits per equity partner (PPP)at the second-tier firms was 30.5 percent lower than the $610,300 posted by the Top 20 firms. That represents a slight closing of the gap, which was 35 percent in last year's survey.
The average PPP was 35 percent lower than the $616,300 figure for the Top 20 firms. That gap was slightly higher than last year's 31.9 percent but equal to the 35 percent gap from 2006 to 2007.
Compensation for all partners, CAP, which pools NEP pay with net profits and divides by the total number of partners at a firm, declined 7.65 percent to $409,525 from $443,400. Last year, CAP went down by 2.7 percent. CAP is designed to provide a basis for comparing how partners of different statuses are paid, since compensation schemes for NEP vary widely firm to firm.
The survey doesn't take into account that firms may be structured as professional corporations, limited liability companies or limited liability partnerships, nor does it distinguish between directors, shareholders and members in determining the number of partners. The only categories are equity partners, nonequity partners and salaried lawyers (such as associates and of counsel).