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american lawyer media news service A quick question: By how much did average profits per equity partner increase last year at the 100 top grossing firms in the country-10.6%, 6.9% or 1.5%? If you chose 10.6%, we have some hot Internet stocks we’d like to sell you. That was the rate of profit growth at the firms in The American Lawyer’s Am Law 100 firms in 1999, the last full year of the stock market boom. But the 1.5% figure is wrong too. That was the rate of profit growth at Am Law 100 firms in 1992, the last time the economy languished in the second year of a downturn. The correct number is 6.9%-much closer to the 1999 rate than the 1992 rate. And the other results from the new Am Law 100, which report results from 2002, are strong too: Gross revenue increased by 8.5% and revenue per lawyer rose by 4%. ( The American Lawyer, which published the Am Law 100 in its July issue, is a sister publication of The National Law Journal.) How, in the face of a lingering economic downturn, did the Am Law 100 manage to rack up robust numbers? It’s not that law firms are immune to economic trends-just ask refugees from Brobeck, Phleger & Harrison, which makes its final Am Law 100 appearance this year, having disbanded in February. Instead, it’s a story of contingency planning. With the dark days of the early 1990s in mind, law firms planned for the worst in 2002 and scaled back their ambitions. Call it the year of living modestly. Expansion takes a back seat With mergers and acquisitions work down, managing partners sang the praises of practice-area diversification, as their firms relied on countercyclical bankruptcy and reorganization practices, as well as steady income streams from litigation and regulatory work. But 2002 was also a year in which expansion took a back seat to cost control. Head count slowed (that 8.5% increase in gross revenue was achieved with only a 4.2% increase in the number of lawyers), and firms held the line on expansion of their equity partnership ranks. The healthy composite averages mask deep pockets of pain, most notably on Wall Street and in Silicon Valley. This year’s sharpest decrease in revenue per lawyer-the best measure of a firm’s ability to command premium fees and top billing rates-was at New York-based Cravath, Swaine & Moore, one of the premier Wall Street firms. Of the 15 firms where revenue per lawyer declined last year, seven were New York firms and two were Silicon Valley firms. Even at the firms where revenue per lawyer dropped, the bottom line stayed strong, thanks to careful expense management. Nine of them showed increases in profits per equity partner, and at the other six, the decreases in profits per partner were not nearly as steep as the drops in revenue per lawyer. (Cravath’s 22% decrease in revenue per lawyer, for instance, translated into an 8% drop in profits per equity partner, and Cravath continues to be the Am Law 100′s second most profitable firm.) So the question remains: In a year in which the average gross revenue of Fortune 500 companies declined by 6%, how were so many firms able to increase their revenue per lawyer? Rate increases were primarily responsible. Despite the sour economy, most firms succeeded in raising billing rates 3% to 6% last year. “We obtained appropriate rate increases in certain markets where we were billing well below our competitors,” said Warren Gorrell, chair of Washington’s Hogan & Hartson, which had a 10% increase in revenue per lawyer. Strict cost controls Higher margins paid off as well. “We focused on obtaining high-value work,” said R. Bruce McLean, chairman of Akin Gump Strauss Hauer & Feld, where revenue per lawyer increased by 13.7% last year. Many firms also took a hard line on collections, decreeing that what Hildebrandt International consultant William Johnston calls the “willy-nilly write-offs of the past” couldn’t continue. Cost controls ensured that revenue enhancements went straight to the bottom line. “Early on, it was quite clear that 2002 was going to be slow, so we instituted a fair number of cost controls,” said Latham & Watkins managing partner Robert Dell, whose firm had an 8.1% increase in profits per partner and a 1.5% drop in revenue per lawyer. Latham identified areas where purchases could be deferred, Dell said; only expenses affecting client service and business development were exempted from review. Said Dell: “If I thought I could stall [an expenditure], I did.” Firms delayed major technology purchases and took advantage of the soft commercial real estate market by renegotiating leases. The largest single expense at law firms is personnel, and there managing partners held the line as well. During the late 1990s, average annual head count increases of 9% to 10% were common, and in 2001 the average size of Am Law 100 firms grew by 11%, despite the downturn. Hildebrandt’s Johnston notes that many firms actually reduced their associate ranks, either through forced layoffs or by encouraging attrition, but kept hiring replacements, leading to the small increase in head count. The slow-growth policy was not confined to the associate ranks. In cutting the size of their equity partnerships, firms continued a process that the survey first found in 2000. In 2002, the size of the equity partnership declined or remained flat at 34 Am Law 100 firms. Overall, the number of equity partners at Am Law 100 firms grew by just 2.8% in 2002, excluding firms involved in major mergers.

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