It’s probably nothing to worry about. Small fluctuations in the legal services market are normal, as are adjustments in law firm ownership, structure, staffing and spending.
But the fact is that New Jersey’s Top 20 bellwether firms retrenched a bit in 2012 from what had been a steady pattern of energetic rebound from the 2008-09 recession.
The Top 20 firms’ combined revenues were $1.677 billion, less than 1 percent lower than $1.69 billion in 2011.
But the drop in profits was more palpable. The firms netted $551.5 million, which was $30 million, or 5.2 percent, less than $581.7 million the year before. That canceled out a 4.9 percent increase in profits enjoyed in 2011.
The revenue plateau was the first since New Jersey law firm earnings began their robust recovery from the 2008 recession.
The profit sag occurred even as equity partnership ranks stayed flat, which meant those partners were taking home less. Average profits per partner fell by 5.5 percent, to $636,000 from $673,000, reversing the 5.3 percent growth in PPP reported last year.
And it coincided with a 10 percent increase in nonequity partners (NEPs), who are paid out of earnings and so reduce the bottom line. Compensation to NEPs also grew, by 10.85 percent, totaling $188.6 million.
Compensation for all partners, including NEPs, also fell, by 5.42 percent, reversing last year’s reported CAP growth of 4.6 percent.
The total number of lawyers employed at the Top 20 stayed relatively flat, dropping 1 percent to 2,997 from 3,027. The attorney count had grown by 1 percent in 2011.
The difference was that in 2011, revenue per lawyer (RPL) showed a 2.7 percent spike, an indication that firms were able to hike billables despite a cautious economy. But because revenue stayed stagnant in 2012, RPL was also flat.
With rare exceptions, the pain was shared across the Top 20. Nine firms showed revenue gains, nine took losses and two stayed statistically flat. Only two firms — Archer & Greiner and Connell Foley — posted double-digit percentage increases. That was offset by comparable downturns by Wolff & Samson and the New Jersey component of Day Pitney.
Profits were up at six firms, down at 10 and flat at four. Only Fox Rothschild’s New Jersey branch showed a strong gain — exemplary in fact, at 61 percent. But three firms’ drops were 20 percent or more, canceling that out.
Lowenstein Stays in Lead
The top spot in revenue continued to be held by Lowenstein Sandler, which last year vaulted over McCarter & English — marking the first time in the Law Journal survey’s history that McCarter vacated the top spot. The survey began in 1987.
Lowenstein had notched $225 million in 2011, so even this year’s 4.4 percent falloff to $215 million kept it ahead of McCarter, which stayed flat at $212 million.
The Roseland firm was one of those that lost heavily in net profits, by 22.3 percent, but that coincided with its bringing on 43.6 percent more NEPs while reducing equity partners by 21.2 percent. As a result, PPP hardly budged at all.
McCarter, chugging along in second place, rebounded from the retrenchment it showed last year. The number of lawyers and equity partners was largely unchanged while NEPs increased by 3 percent. Profits fell by 4.5 percent, so equity partners took a 3.4 percent cut in PPP, to $570,000 from $590,000.
Still, that was a vast improvement from last year’s survey, which reported an 11.9 percent drop in profits and a corresponding 11 percent fall in PPP.
There was little movement this year from last among the firms ranked third to 10th in the survey. McElroy, Deutsch, Mulvaney & Carpenter stayed in third place despite being virtually flat in revenue, at $116.5 million. Gibbons showed a modest 3.6 percent growth and stayed in fourth place with $115 million.
Archer & Greiner’s strong 11.4 percent surge vaulted it into fifth place over Sills Cummis & Gross, which registered a second straight year of decrease. Its revenues dropped 8.1 percent to $90.5 million from $98.5 million, about double its 4.2 percent drop last year.
Sills Cummis lost 11.4 percent of its equity partners while picking up 7.1 percent more NEPS, which may have reduced its high-end billables. Still, it held sixth place this year by a comfortable margin.
Profits Follow Partners Out the Door
Net profits tended to fall most sharply at firms that also lost a good number of equity partners, an indication that the loss of billables at the top-partner level can hit hard even the highest-earning firms’ profitability.
In some cases, like Lowenstein’s, the correlation between smaller net and fewer equity partners appears to be a conscious restructuring — the adding of more NEPs. In fact, the firm’s percentage increase in total compensation to NEPs was roughly equivalent to the drop in net profits.
At Day Pitney’s New Jersey branch, however, there are no NEPs (at least in the public eye), so the correlation between its 13.3 percent drop in equity partners and its 13.8 decrease in net profits appears to be the result of a falloff in revenues — which, coincidentally, was 13 percent.
At Porzio, Bromberg & Newman, by contrast, profits dropped by 27.3 percent with no loss of equity partners, and Wilentz, Goldman & Spitzer was down 20.4 percent in profits while losing only 4.3 percent of equity partners.
Last year was the second straight period of lack of lawyer growth. Except for Connell Foley, which added 14 lawyers, firms either lost lawyers (12), stood pat (3) or hired sparingly (4). The largest losses were at Norris, McLaughlin & Marcus (23) and Day Pitney (15).
Equity partners were up at seven firms, with the biggest bulk increase at Fox Rothschild (24). That counterbalanced the large losses at Day Pitney, Gibbons, Lowenstein and Sills Cummis.
Nonequity partner growth was the one strong area. The 10 percent increase statewide was shared by 12 firms. Only one firm, Norris, McLaughlin, lost NEPs.
As in past years’ surveys, for out-of-state-based firms — Day Pitney, Drinker Biddle & Reath, Fox Rothschild and Greenberg Traurig — the Law Journal requested data only for their New Jersey operations, and those firms are so demarcated on the chart. •