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New Jersey’s large firms obviously went to school during the last recession, which produced lower or flat profitability throughout the first half of the 1990s. The lessons learned — work smarter for bigger clients and restructure the firm to keep the focus on the bottom line — continue to pull the top firms through this latest slowdown with flying colors. In 2002, the state’s 20 top-grossing firms collectively increased revenues by a record 10.2 percent, producing a hike in revenues per lawyer of just over 6 percent and, more important, a jump in profits per partner of 8.8 percent. The average PPP was $435,400, not only a record but also the biggest increase since 1998 and the third-largest increase since the Law Journalbegan its annual financial survey in 1987. Both PPP and RPL, the latter of which averaged $404,800, broke the $400,000 plateau for the first time. The critical firm redesign that’s been evolving is manifested in fewer equity partners, fewer new associates relative to laterals and a fatter middle corps of experienced lawyers, which translates into higher billing rates. It’s what law-firm management consultants call “the diamond” — as distinguished from the traditional pyramid structure that had a small cadre of senior partners at the top, fattening out to junior partners, team leaders and finally, an army of young associates. “Everybody’s gravitating toward the diamond,” says Steven Gross, managing partner with Newark’s Sills Cummis Radin Tischman Epstein & Gross. While each firm’s business plan differs, there’s little doubt that collectively partners are doing what is necessary to push profits: culling smaller clients; increasing the number of younger partners and counsel with books and the ability to handle more sophisticated matters; shedding marginal practices; beefing up successful ones and adding new ones, usually as complements to an existing practice; and keeping a keen eye on costs for everything except labor. At Morristown’s Porzio, Bromberg & Newman, three new departments have opened in the past year or s a four-lawyer bankruptcy group to capture that work from existing clients; a six-lawyer real estate and land-use group to capitalize on the growth in Morris County and points west; and a pharmaceutical regulatory and compliance group to help existing drug company clients with product liability and mass tort cases as well as issues before the Food and Drug Administration and the federal Health and Human Services Department. At Sills Cummis, a recently added spinout specialty is aiding pharmaceutical and high-tech clients with shepherding overseas recruits through the immigration process. Wilentz, Goldman & Spitzer, which lost white-collar criminal partner Barry Albin to the state Supreme Court, brought in five laterals, four as counsel, to beef up its white-collar practice. LATERAL PASSES In keeping with the trend, much of the new work is being done by laterals who defected, sometimes from large-firm competitors. Wilentz, Goldman, as an example, picked up talent from the Morristown firms of Riker, Danzig, Scherer, Hyland & Perretti and McElroy, Deutsch & Mulvaney, as well as New York’s Patterson, Belknap, Webb & Tyler. Porzio, Bromberg’s new bankruptcy shop is staffed by a partner-led trio from Riker, Danzig, but the firm also lost an equity partner to Somerville’s Norris, McLaughlin & Marcus last year. While Sills Cummis lost litigation partner Philip Sellinger to the new Florham Park outpost of Miami’s Greenberg Traurig, it welcomed lateral partners from two other multistate firms, Morrison & Forster and Goodwin Proctor. Sills Cummis also brought aboard new blood from New York’s Proskauer Rose and Houston’s Akin Gump Strauss Hauer & Feld. Both came in as of counsel. McElroy, Deutsch, which increased its revenues by almost 19.7 percent, the best in the survey, has been luring laterals steadily for years. The firm has nearly doubled in size since 1997. Managing partner Edward Deutsch says the goal is to “have revenue growth outstrip the growth in manpower by getting lawyers who are more efficient and more effective and can therefore bill at higher rates” But Deutsch and Porzio, Bromberg managing partner D. Jeffrey Campbell issue caveats about the lateral scramble. Deutsch says his firm maintains a balance by continuing to bring in a freshman class of about 10 each fall, in part to have the horses to do lower-level work and offer clients lower rates. Campbell, whose firm continues to be the most overweighted statewide in its use of paralegals — currently at 90 — agrees, saying that new associates help ensure the firm’s culture. The rush to the diamond through the use of laterals “can be a quick fix to help the next quarter or year, but may not always be best for the long-term growth,” he says. Porzio, Bromberg still brings in a fall class of about five. Deutsch, meanwhile, agrees with many other managing partners on the issue of shedding unprofitable clients. While Sills Cummis managing partner Gross defines such a client as usually a company that is too small, Deutsch says his firm still serves many small clients. He defines an unprofitable client as “those who are difficult to deal with, or who don’t pay, or who want us to handle a matter in a manner that we think is inappropriate even if not unethical, something in those gray areas.” He adds that good, small clients not only pay but also send referrals. ENTER REED SMITH The latest firm to make the Top 20 is behemoth Reed Smith, which has more than 1,000 lawyers in 17 offices, including 84 in Princeton and Newark. The Pittsburgh-based firm opened its Princeton office in 1992, when Leonard Bernstein bolted from Philadelphia’s Blank Rome Comisky & McCauley to establish Reed Smith’s beachhead in New Jersey. Since then, it has grown dramatically, mostly with homegrown talent from in-state firms. It opened its Newark branch with a trio of lawyers in 1996. Reed Smith’s in-state operation has grown, shooting up to 41 in 1997 and more than doubling by 2002. The firm is No. 12 on the chart , with a gross of $35.7 million based on an RPL of $425,200, which is slightly under Reed Smith’s national RPL. Steven Picco, managing partner for New Jersey, points out that three of the firm’s top 10 producers are in-state. Picco, an environmental lawyer, is one; the other two are corporate and transactional partners in Princeton, J. Fred Connery III and Diane Frenier. Picco says that while Reed Smith has traditionally used the pyramid structure nationally, it recently has been searching for more second-, third- and fourth-year associates, particularly in Princeton and Newark. He says the firm’s formula for all laterals is to “first solidify our relationship with them and their clients, then begin an intense cross-selling, and also to fit them into practices we emphasize.” He names product liability, employment and labor and high-end litigation as areas where many associates are needed for support. Reed Smith, not surprisingly, does more transactional work, with more Fortune 500 and Fortune 100 companies, than most New Jersey firms. Its clients include large pharmaceutical and related life-sciences companies, financial institutions, energy firms and technology corporations. Picco says the 2002 mix was about two-thirds corporate and one-third litigation. In making the list, Reed Smith has knocked out Princeton’s Stark & Stark, which just missed the Top 20 by $500,000, with a gross of $26.5 million, up slightly from the year earlier. Moreover, the replacement of Stark & Stark with Reed Smith, with $9.2 million more in revenue, pushes up the overall increase in total revenues to 10.2 percent. The year-to-year average revenue increase for the same 20 firms, including Stark & Stark, is 9.18 percent, which is still impressive. Reed Smith is the third out-of-state firm to make the Top 20, but the first to do so without acquiring an in-state firm. Drinker Biddle & Reath of Philadelphia, which swallowed Shanley & Fisher of Morristown in 1998, remains in the eighth spot, with revenues of $60.9 million, an increase of more than 13 percent. Fox, Rothschild, O’Brien & Frankel, also based in Philadelphia, remains in the 19th position with a gross of $28.3 million, good for an 8.85 percent hike from 2001. Fox, Rothschild acquired Horn, Goldberg, Gorny, Daniels, Plackter & Weiss of Atlantic City five years ago. As was the case last year, the numbers for the Pennsylvania-based firms represent only their New Jersey offices, while the survey continues to report the revenues and lawyers of the New Jersey firms from all their locations, including out-of-state offices. So, the ongoing melting of state borders of the legal market makes the survey less than a true apples-to-apples comparison. MCCARTER IN THE RAREFIED AIR The 2002 results contain several other firsts besides the appearance of Reed Smith on the list. In addition to the average RPL and PPP topping the $400,000 mark for the first time, a New Jersey firm has crossed the $100 million line in revenues. That, of course, is Newark’s McCarter & English, which, with only a nominal increase in the number of lawyers, managed to push its revenues up by 11.26 percent over the total for 2001. For the first time McCarter is also reporting a two-tier partnership system, showing 24 nonequity partners. Therefore, McCarter’s PPP of $441,200 seems high compared with last year’s $342,500. While it is a record for the 258-lawyer firm, it is not the first time McCarter has topped $400,000 in per-partner profitability. Sills Cummis is No. 1, for the first time, in revenues per lawyer, at $496,800, besting Porzio, Bromberg, which led that category in 2001. Porzio, Bromberg did retain its position as the most profitable firm statewide, with a PPP of $677,800, the highest recorded since the survey began. The firm did it with a slight dip in revenues, the only firm among the Top 20 to show lower revenues, along with a 10.3 percent drop in its net profit. Moreover, the firm had just two additional lawyers, 61 compared with 59 a year earlier. The huge per-partner profitability is due again to the firm’s leverage — 6.78 lawyers for each equity partner. Porzio, Bromberg had only 11 equity partners in 2001, dipping to just nine last year as two senior partners became of counsel. With one equity partner leaving and another coming to the firm, only nine equity partners shared the pie. The 2002 chart also shows a record number of lawyers collectively, producing an average-sized firm of just over 122 lawyers. That number has been growing since 1997, after five years of a reduced or a static size among the top firms. While the number of firms with more than 100 lawyers remains at 10, the number of firms with more than 90 jumps to 13, from 11 in 2001 and nine in 1999 and 2000. THE PROFITABLIITY FORMULA But the numbers that count the most are those that generated the record profits. The number of equity partners declined by 23, or 2.9 percent, kicking up the average leverage to 3.18, which ties the highest overall leverage in the 16 years of the survey. Last year’s leverage was 2.97. The last time leverage was this high was 1990, before the sky fell as firms shed associates when the 1980s boom finally burst. Two-tier systems continue to be installed, as making partner becomes tougher. This year’s survey shows 13 firms using such a system, up from 12 last year and 11 in 2000. The combination of this robust revenue growth with high leverage naturally produced an automatic advance in the so-called API (American Lawyer Profitability Index). API, computed by dividing PPP by RPL, is designed to measure profitability. The higher the quotient, the more profitable the firm is at converting revenues into profits. The 2002 API of 1.07 is the highest, not surprisingly, since 1990. Even Wilentz, Goldman and Roseland’s Connell Foley, firms that traditionally ignore leverage and have many more partners than do most firms, saw their leverage jump in 2002. At Connell Foley, it was caused by two senior partners reaching the mandatory age of 65 and staying with the firm on a contractual basis. As for this year and beyond, many managing partners say they are having another record year. “The market is really strong,” says Dennis LaFiura, managing partner at Florham Park’s Pitney, Hardin, Kipp & Szuch, who says growth is being driven by litigation and corporate work, especially intellectual property, patent and trademark matters, and employment and labor defense work. Peter Frazza, co-managing partner with the Short Hills firm of Budd Larner Rosenbaum Greenberg & Sade, says the firm’s 2003 receipts are running ahead of last year’s, which produced a 17.3 percent jump for 2002 in revenues. He says the firm, with 90 lawyers last year, now has more than 100. The only negative note is a slight dip in the average margin from 35 percent to 34 percent, reflecting higher expenses. But that appears to be mostly due to bringing on board more, and more experienced, lawyers. And that seems to be a statistic the top partners can deal with.

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