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Past the Tipping Point

Is the law firm pyramid an unstable structure? A look at the most leveraged Am Law 100 firms.

The American Lawyer

By Susan Beck

January 01, 2009

In May, we published a small chart showing the five most "leveraged" firms in The Am Law 100, based on the ratio of all lawyers to equity partners. At the time, the list seemed mildly interesting, but not of great importance.

Today, as we cower amidst the debris of a shattered financial world, the list looks eerily prescient. The five firms on the list are Cadwalader, Wickersham & Taft (8.49 lawyers per equity partner), White & Case (6.63), Orrick Herrington & Sutcliffe (6.26), Thelen (6.13), and Bingham McCutchen (5.95). The first three have announced layoffs, and Thelen is dissolving. If we extend the list to ten firms, seven of them have publicly acknowledged cutbacks. [The chart below ranks the entire Am Law 100 by leverage.]

Over the last couple decades, high leverage--the practice of having each equity partner supported by three or more associates or income partners--was accepted as a basic tenet of profitability. A firm billed out these junior lawyers at significantly more than it paid them, often getting billings that were triple the lawyer's salary. It seemed like a sure-fire way to make money. But high turnover and rocketing salaries ate into profit margins. Now, the whole pyramid model is looking fragile.

One problem facing highly leveraged firms is that they tend to focus on dwindling practices. Structured finance is the prime example. Firms assigned armies of associates to these deals, which often followed a cookie-cutter format. At one time, investment banks didn't blanch at paying nearly $300 an hour for a first-year, but that gravy train has left the station and may not come back.

For the work that does remain, like litigation and more mainstream corporate deals, clients will increasingly seek to reduce costs. More work will likely be assigned to contract lawyers, attorneys in India, or a computer.

Benjamin Heineman, Jr., the former general counsel of General Electric Company, now senior counsel at Wilmer Cutler Pickering Hale and Dorr, is one observer who believes that the golden days of leverage are over. "The guts of this debate is productivity. More lawyers per partner doesn't improve productivity," he says. Susan Hackett, general counsel of the Association of Corporate Counsel, is another. "I don't have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn't worth it," she says.

Sometimes the problem isn't too many associates but too many nonequity partners, as was the case at Thelen.

But not all the firms among the top five are suffering: Bingham expects to see revenue grow 6.5 percent in 2008, according to chairman Jay Zimmerman.

The model still has its believers. Leverage is "very good in very good economic times and not good in bad economies," says Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy. When the economy comes back, he expects firms such as Milbank that do "high-end, complex work" will benefit.

If leverage is the problem, what's the solution? Trimming salaried ranks is one option, and layoffs are probably the only way to do that, as attrition rates are near zero. Another option is to cut salaries for those doing routine work. McDermott Will & Emery, for example, recently created a separate track of staff lawyers who are paid much less than their regular associates. The program has been a success, and the firm plans to double its size. (It declined to reveal how many staff lawyers it has.) Jeffrey Stone, who heads the firm's trial department, says these lawyers offer clients better value than contract lawyers because there is less turnover and the firm can control quality. "I think there's some sizzle to this idea," he says.

THE AM LAW 100 BY LEVERAGE
Rank	Firm Name	Leverage*
1	Cadwalader	8.49
2	White & Case	6.63
3	Orrick	6.26
4	Thelen Reid1	6.13
5	Bingham McCutchen	5.95
6	Dewey Ballantine2	5.89
7	Weil, Gotshal	5.79
8	Greenberg Traurig	5.74
9	LeBoeuf, Lamb2	5.70
10	Dechert	5.66
11	King & Spalding	5.64
12	Sheppard, Mullin	5.58
13	Kramer Levin	5.55
14	Paul, Weiss	5.50
15	Kirkland & Ellis	5.48
16	Mintz, Levin	5.47
17	Paul, Hastings	5.42
18	Holland & Knight	5.27
19	Schulte Roth	5.24
19	Wilson Sonsini	5.24
21	Squire, Sanders	5.19
22	Kirkpatrick & Lockhart	5.08
23	Chadbourne & Parke	5.01
24	Sidley Austin	4.97
25	DLA Piper US	4.96
26	Morgan, Lewis	4.95
27	Baker & McKenzie	4.88
28	O'Melveny & Myers	4.87
29	Shook, Hardy	4.86
30	Cleary Gottlieb	4.83
31	Reed Smith	4.82
31	Alston & Bird	4.82
33	Milbank, Tweed	4.78
34	Dickstein Shapiro	4.76
35	Duane Morris	4.73
36	Buchanan Ingersoll	4.71
37	Sonnenschein	4.69
38	Shearman & Sterling	4.68
39	Howrey	4.62
40	Cravath	4.58
41	Winston & Strawn	4.56
42	Bryan Cave	4.50
43	Mayer Brown	4.47
44	Quinn Emanuel	4.46
45	Akin Gump	4.43
45	Heller Ehrman3	4.43
47	Skadden	4.41
47	Simpson Thacher	4.41
49	Cooley Godward	4.40
50	Proskauer Rose	4.39
51	Debevoise & Plimpton	4.34
52	Latham & Watkins	4.31
53	Willkie Farr	4.30
54	Edwards Angell	4.29
55	Kilpatrick Stockton	4.26
55	Katten Muchin	4.26
55	Patton Boggs	4.26
55	Jones Day	4.26
59	McGuireWoods	4.21
60	Pillsbury Winthrop	4.18
61	Morrison & Foerster	4.15
62	Baker & Hostetler	4.14
63	Cahill Gordon	4.13
64	Fish & Richardson	4.09
65	Goodwin Procter	3.98
66	Perkins Coie	3.97
67	Fried, Frank	3.89
67	McDermott Will	3.89
69	Foley & Lardner	3.87
70	Stroock & Stroock	3.77
71	Hunton & Williams	3.76
72	Kaye Scholer	3.71
73	Sullivan & Cromwell	3.68
74	Davis Polk	3.65
75	Sutherland Asbill	3.64
76	Baker Botts	3.55
77	Hogan & Hartson	3.51
78	Troutman Sanders	3.45
79	Seyfarth Shaw	3.39
80	Blank Rome	3.24
81	Pepper Hamilton	3.22
82	Venable	3.17
82	Gibson, Dunn	3.17
84	Womble Carlyle	3.15
85	Nixon Peabody	3.12
86	Finnegan, Henderson	3.10
87	Dorsey & Whitney	3.07
88	Wilmer	3.04
89	Covington & Burling	2.98
90	Drinker Biddle	2.95
91	Ropes & Gray	2.94
92	Vinson & Elkins	2.93
93	Ballard Spahr	2.87
94	Steptoe & Johnson	2.78
95	Jenner & Block	2.76
96	Wachtell	2.68
96	Littler Mendelson	2.68
98	Arnold & Porter	2.64
99	Fulbright & Jaworski	2.63
100	Faegre & Benson	1.89
*Leverage is the ratio of all lawyers to equity partners, based on most recent Am Law 100 numbers.
1 Dissolution announced in October 2008.
2 Dewey Ballantine and LeBoeuf, Lamb merged in Ocotber 2007.
3 Dissolution announced in September 2008.