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NEW YORK � Since 1986, when The American Lawyer first published a list of the 100 highest-grossing firms in the United States, the total number of lawyers in The Am Law 100 has almost tripled. In 1986, it numbered 25,994. In 2005, it reached 70,161. That’s a truly stunning increase, and one that you might think was the foundation for The Am Law 100′s wondrous escalation in profits per partner, which in this year’s survey averaged more than $1 million.
CHART: Revenues

If you did think that, though, you’d be wrong. The historical data suggests that The Am Law 100, as a universe, is growing too fast in size to sustain its own long-term revenue expansion. All those additional lawyers are a drag on the growth of revenue per lawyer. Don’t misunderstand: Gross revenue is expanding. But bulging firm size is diluting the value of Am Law 100 lawyers. We came to that realization after tracking a different theory entirely. We noticed that head count growth in The Am Law 100 had slowed considerably in the last few years, up less than 2 percent in 2004 and less than 3 percent last year. We also knew that the number of students graduating from law schools over the last two decades had barely budged, increasing only 10 percent, from about 36,000 in 1986 to about 40,000 last year. So we wondered: Had the firms of The Am Law 100 finally begun to exhaust the supply of lawyers willing and able to do their work? The answer, we discovered after talking to the leaders of a dozen Am Law 50 firms, is a resounding no � with one caveat. A few firms, most notably Cravath, Swaine & Moore and Wachtell, Lipton, Rosen & Katz, still hire almost all of their lawyers right out of school or judicial clerkships. The growth of these firms has been constrained by supply. In 1986, at 233 lawyers, Cravath was an average-size Am Law 100 firm. This year Cravath has 391 lawyers-and the average Am Law firm has 702. Says incoming presiding partner Evan Chesler: “That’s based only on the fact that we recruit only from law schools.” For Cravath and others, finding first-year associates who meet their qualifications is like looking for oil: They’re a limited resource, and there aren’t any untapped sources left. Twenty years ago, Skadden, Arps, Slate, Meagher & Flom pioneered the recruiting of top-ranked students from second-tier law schools without fear of running into Am Law 100 competitors on campus. Today, every Am Law 100 firm is recruiting and hiring from far more law schools than it did 20 years ago. Jones Day, to cite just one example, drew from 58 law schools to stock its 2005 class of about 135 first-years. If the entire Am Law 100 relied only on first-year associates for growth, we might indeed be approaching a natural size limit. But junior lawyers haven’t fueled The Am Law 100′s cumulative growth over the last 20 years-laterals have. While a significant percentage of laterals move between firms in The Am Law 100, thousands of lawyers have moved from firms outside The Am Law 100 into firms on the list, whether on their own or as part of a merger. “We count on the migration of talent to higher-quality law firms,” says Chairman and Managing Partner Robert Dell of Latham & Watkins, a firm that has managed growth with enviable success over the last decade. A BIGGER PIECE OF THE PIE — TOO MUCH TO SWALLOW? The statistics prove Dell’s point: The Am Law 100 employs an ever-increasing percentage of all U.S. lawyers. According to the American Bar Foundation, 655,191 lawyers were registered with state bars in 1985. Approximately 3.8 percent of them worked at Am Law 100 firms. (The number is approximate because The American Lawyer only began gathering statistics on 100 firms in 1986.) In 1995 The Am Law 100 employed 4.4 percent of the 857,931 lawyers in the U.S. In 2000, the figure was up to 5.2 percent of 1,066,328 lawyers; and in 2004, it was approximately 6.3 percent of 1,084,504 (the 2004 total comes from the American Bar Association, not the ABF). Put simply, since 2000 The Am Law 100 has been growing faster than the U.S. lawyer population. But plenty of potential laterals are still out there waiting to join The Am Law 100, particularly as firms grow more comfortable with hiring overseas lawyers educated at foreign law schools. If first-year associates are the oil of The Am Law 100′s head count growth, laterals and foreign lawyers are highly effective alternative fuels. In fact, when we considered the data, we reached an entirely different conclusion than what we expected: There isn’t a shortage of lawyers to drive the growth of The Am Law 100. There’s a surplus within The Am Law 100. Take a look at these comparative rates of growth. Over the 20 years of The Am Law 100, revenue per lawyer has expanded by 162 percent, from $276,500 in 1986 to $725,000 today. One hundred sixty-two percent sounds great, but it doesn’t account for inflation. According to the Bureau of Labor’s inflation calculator, $276,500 in 1986 is the equivalent of $510,464 in 2006. That still means an increase in average revenue per lawyers of 42 percent over the last 20 years, which is impressive until you consider growth in lawyer numbers over the same period of time. Since 1986 the cumulative head count of The Am Law 100 has grown by 170 percent (and people, unlike dollars, aren’t adjustable for inflation). In the U.S.’s 100 highest-grossing firms, in other words, additional lawyers are slowing the rate of revenue growth. Firms have continued to improve profitability by cutting costs, boosting efficiency, and making equity partnership more exclusive, but RPL remains the barometer of The Am Law 100′s overall health. And, over the long term, RPL expansion is not keeping pace with head count increases. Growing, it turns out, is easy. Growing profitably is what’s hard. 2005: SHRINKING TO GROW Average billable hour statistics provide convincing evidence that last year The Am Law 100 had too many lawyers. Even at the 30 most profitable firms included in Citigroup’s 2005 survey, partners and associates averaged only 1,850 billable hours. (Citi’s survey was not confined to The Am Law 100; indeed, six of the most profitable firms were in the Second Hundred.) At the other 119 firms Citigroup surveyed, the billable-hour average was even lower-under 1,800 for partners, slightly higher for associates. “Across the board,” says William Perlstein of Wilmer Cutler Pickering Hale and Dorr, which held head count growth to 2.7 percent last year, “utilization was under 2,000 hours.” Twenty-eight Am Law 100 firms responded by shrinking � the surest route to significant improvement in revenue per lawyer in 2005. All but two of the 28 improved RPL as a result of this contraction. Consider the experience of Akin Gump Strauss Hauer & Feld, whose head count decreased by 3.4 percent between 2004 and 2005, in what Managing Partner R. Bruce McLean describes as an ongoing effort to sharpen the firm’s focus on its most profitable practices. As asbestos defense, for example, became increasingly commoditized and price-sensitive, Akin Gump shed between 25 and 30 asbestos lawyers. The effect: Revenue per lawyer rose 4.7 percent in 2005. “In the 1990s we tried to build a national firm, and we grew from 450 lawyers to 1,000 lawyers,” McLean says. The firm now has 794 lawyers. “Since 2000 we’ve tried to focus on doing what we do well, so we can compete at the top of the market in those practices.” Of the 28 firms with head count declines in 2005, 16 achieved increases in RPL that beat the Am Law 100 average of 7.5 percent. We can also look at a different data set: firms with the highest rate of RPL growth. Twenty-two firms pulled off double-digit increases in RPL in 2005. Thirteen of them decreased head count. Only four of the firms with the biggest increase in revenue per lawyer grew in size by more than 5 percent � Dickstein Shapiro Morin & Oshinsky, Troutman Sanders, Kramer Levin Naftalis & Frankel, and Sutherland Asbill & Brennan � and all of them were relatively small to begin with. The firms that expanded head count significantly, on the other hand, struggled to translate size into revenue in 2005. Seventeen firms in The Am Law 100 grew head count by more than 7 percent in 2005. Four of those rapidly expanding firms experienced declines in revenue per lawyer. Only six of them managed to achieve above-average RPL increases. Call these firms the Am Law growth champions of 2005: Dechert; Dickstein Shapiro; Kramer Levin; Latham; O’Melveny & Myers; and Troutman Sanders. Of the 100 firms on the list, these six matched supply and demand most efficiently, adding lots of lawyers but quickly turning those new bodies into revenue generators, not dilutors. HISTORY’S HEAD COUNT HEADACHE History shows how rare a feat that is. As a group, the firms of The Am Law 100 have never been very good at predicting how big they should be. Firms have typically grown based on past demand for their services, which means that over the last 20 years there have been some calamitous mismatches between the supply of Am Law 100 lawyers and client demand for their time. Between 1990 and 1991, for instance, The Am Law 100 grew in size by 3 percent � in a year when RPL actually declined. Remember what ensued? Layoffs at firms where firing lawyers would once have been unthinkable, or else profits per partner declines of 10-15 percent. Head count at The Am Law 100 didn’t reach 1991 levels again until 1995, after contraction produced three years of RPL growth. Or look at the go-go years of the tech bubble. Despite all the moaning about associates decamping for dot-coms, The Am Law 100 grew like crazy between 1998 and 2001. RPL rose consistently, but never at a rate that matched head count growth. Between 1999 and 2000, for instance, RPL was up by 6.5 percent. Head count grew by 9.9 percent. The next year, The Am Law 100 added another 6,263 lawyers, or 11 percent-even as the tech bubble burst and the boom in capital markets work abruptly ended. Average revenue per lawyer barely moved that year, leaving The Am Law 100 with too many underproducing lawyers. Firms are still recovering from that hiring binge four years ago, still trying, says Morrison & Foerster Chair Keith Wetmore, to boost average billable hours back up to 2000 levels. The Am Law 100, which sets goals for incoming first-year classes two years before recruits join their firms, isn’t particularly nimble in responding to economic crises. Head count is a lagging indicator. And that may be cause for concern in the near future. Slow head count growth has contributed to solid revenue per lawyer increases in the last three years. The Am Law 100′s average RPL has increased by 5.8, 8.3, and 7.5 percent in the three years since 2002 � an RPL stretch that actually beats the boom between 1998 and 2000. Because billable hours have been low, however, just about all of that revenue growth has come through average billing rate increases of 5-7 percent every year since 2002. But underneath those averages is an increasingly differentiated market. Clients aren’t stupid. They’re willing to tolerate rate increases for some of the work that Am Law 100 firms do � but not for all of it. Volume discounts, preferred counsel panels, and reverse auctions aren’t just talk anymore; they’re increasingly real for all but the small segment of the Am Law 100 population that’s able to dine exclusively on rate-tolerant work. Every other firm has seen some percentage of its work become rate-sensitive. A few megafirms, like Jones Day and Sidley Austin, still preach the ideal of full service in all practice areas to clients across the world; but most of the firms of The Am Law 100 will, in coming years, have to figure out some optimal mix of premium and rate-sensitive work. Expect more firms to make the decision Akin Gump did, shedding relatively low-margin practices and the lawyers who work in them. KNOW YOURSELF We’re not advocating that all the firms of The Am Law 100 slash head count. That’s hardly a long-term growth strategy. We’re simply acknowledging that there is a limit to the growth of The Am Law 100: client demand for the highest-end legal services. It may seem contrary, in an era in which worldwide appetite for U.S. � and U.K. � style legal services keeps growing, to posit a limit on that demand. Right now there are a lot of Am Law 100 firms working internationally, and some that aren’t among the market leaders domestically are thriving overseas. But eventually the market for international work will become as differentiated as the domestic market, with rate-tolerant international matters concentrating in a small number of firms. In the next decade, the firms � there may be 15, there may be 30 � that are able to attract the highest percentage of rate-tolerant work, whether in the U.S. or internationally, will widen the gap between themselves and the rest of the firms in The Am Law 100. “More market share,” predicts Ralph Baxter Jr., the growth-minded chairman of Orrick, Herrington & Sutcliffe, “will be in the hands of the strongest firms.” As those firms expand to meet client needs around the world, and grow in profitability because they’re in demand, they’ll absorb an increasing share of the most talented lawyers from other firms, which will only accelerate market segmentation. (New York remains a unique market, with a handful of firms such as Wachtell, Cravath, Sullivan & Cromwell, and Simpson Thacher & Bartlett continuing to attract the most profitable work without growing in size at anywhere near the average rate of The Am Law 100.) “Clients know what they need, and they don’t need a brain surgeon to stitch up a small wound,” Baxter says. “The market is increasingly clear in identifying what it needs. What this is really about is: How much value is a law firm delivering?” Aside from Skadden, two of the firms that have grown most efficiently in the last five years are Latham & Watkins and Kirkland & Ellis. Latham’s growth has been carefully directed, with hundreds of targeted lateral acquisitions and an international sweep of offices designed both to broaden and to deepen the firm’s client base in an array of practice areas. Head count is up 39 percent at Latham since 2001. RPL is up 32 percent. At Kirkland, says executive committee member David Bernick, “our approach is not to have a policy.” And even though the firm has grown by 36 percent since 2001, to almost 1,000 lawyers, Bernick continues to describe Kirkland as “a slow-growth firm [that] has always assumed that there is a limit to how much you can grow, and how fast you can grow and maintain the quality that brings people to your door.” Kirkland culls young lawyers ruthlessly, keeping its equity partner ranks small and its profits high. That strategy, in turn, permits the firm to attract and retain lawyers for whom clients are willing to pay premium rates, which is why much of Kirkland’s expansion has been in those profitable practice areas. (In the interest of stability and client service, Bernick says, Kirkland also does its share of less novel, more price-sensitive work.) Since 2001, revenue per lawyer has matched head count growth: up 36 percent. For Kirkland and Latham, head count expansion has been profitable because both firms have clear (though different) ideas of how they should be growing. In the continuing consolidation that shapes The Am Law 100 over the next ten years, that clarity is indispensable. Firms need to understand their place in the market for legal services � even if that means an uncomfortable self-examination � and manage head count accordingly. Don’t grow to be big. Grow to be smart. Alison Frankel is a reporter with The American Lawyer, a Recorder affiliate based in New York City.

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