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So by now we all know that Wiley Rein’s profits per equity partner spiked by an extraordinary 465 percent in 2006 to $4.4 million, the highest ever recorded for a firm — at least since our sister publication, The American Lawyer, has been measuring such things. Other D.C. firms saw impressive (if less jaw-dropping) increases last year in their profits per partner, too. At Howrey, for instance, the figure shot up 27 percent to $1.2 million, and Finnegan, Henderson, Farabow, Garrett & Dunner marked a 25 percent increase to $1.1 million. Meanwhile, partners at D.C. stalwarts WilmerHale, Williams & Connolly, Covington & Burling, and Steptoe & Johnson saw their profits go up at a more measured pace, ranging from 7 to 11 percent. (The average increase in PPP for D.C. 20 firms was 11 percent — if you take Wiley Rein’s numbers out of the picture). Steptoe and Covington’s PPP crossed the coveted $1 million mark for the first time to $1 million and $1.1 million, respectively. WilmerHale and Williams & Connolly came in at $980,000 and $946,000, respectively. It all makes for sexy copy and clip-and-save charts, but how much do these numbers really tell us about the financial health of these firms? First of all, contingent fees fueled the growth at the D.C. 20 firms whose profits grew at the fastest clip. So, while Wiley Rein, Howrey, and Finnegan had excellent years, these numbers aren’t necessarily a good predictor of future performance — just ask the lawyers at Dickstein Shapiro. Second, though PPP is often touted as a key barometer of a law firm’s success, not all PPP numbers are created equal. Taken alone, PPP can give a misleading reading of partner pay and a firm’s true financial condition. It’s all about how law firms define the word “partner,” and that definition is something that seems to be becoming looser. FEELING THE PINCH WilmerHale, Steptoe, Williams & Connolly, and Covington use the designation in more or less the same way. Each partner owns an equity stake in the firm, and that partner’s compensation is closely tied to the firm’s overall performance. If the firm takes on too much pricey real estate or has to shut down an unprofitable foreign office, all partners feel the pinch. At Howrey, however, more than 40 percent of the partners in Washington are nonequity partners, meaning that, like associates, they receive most of their pay in the form of a salary. The nonequity partnership ranks at large firms keep on growing. In fact, only 20 firms in the AmLaw 100 have kept their one-tier system. “There’s enormous variation in terms of who is considered a partner,” says WilmerHale’s co-managing partner, William Perlstein. “We have only equity partners, and that includes people 8 1/2 years out of law school and people two years away from retirement.” Nonequity partners are often younger lawyers newly promoted to the partnership ranks, older lawyers approaching the end of their career, laterals who have yet to demonstrate their earning power, or technical experts who don’t have much of a client base. And they earn a whole lot less than their equitized colleagues. At Howrey, nonequity partners average just $411,000 annually, while equity partners rake in $1.2 million. But because the profits-per-partner figure measures only the compensation of equity partners, most of the freshly minted and lowest-paid “partners” at firms such as Howrey don’t count toward the firm’s PPP. That makes for an unequal comparison between two-tier firms such as Howrey and firms that retain a one-tier structure. Something else to consider is whether foreign partners are thrown into the mix. At some firms, lawyers from offices outside the United States aren’t given a stake in the firm’s overall partnership. As “local” partners, their results aren’t factored into firmwide averages. This can boost numbers as well, because partners in Mexico City or Moscow can rarely bill at New York or Washington rates. Nonetheless, despite its limitations, PPP holds its sway. “We don’t want to be a slave to PPP,” says WilmerHale’s Perlstein, but on the other hand, you have to realize that it’s a very competitive business.” A METRIC SYSTEM Firms’ average compensation to all partners is a more sensible metric to consider, as it allows for comparisons to be made among firms with different partnership structures. These numbers paint a different picture. Average compensation for all partners at Howrey is $877,000, versus $980,000 at WilmerHale, $1.1 million at Covington, and $946,000 at Williams & Connolly. But average compensation has yet to acquire the same patina for surveys and marketing purposes as PPP, even though it’s a better way of looking at profitability from one firm to another, says Richard Gary, a California-based consultant. “It doesn’t have the same appeal,” Gary says. “PPP is a sexier number.” Gary, who chaired Thelen Reid & Priest from 1992 to 2003, suggests that the best indicator of a firm’s financial strength is revenue per lawyer, which reflects the rates a firm is able to charge and the number of hours it gets each lawyer to bill. By that measure, the lineup changes again, with Howrey at $913,000, WilmerHale at $890,000, Covington at $825,000, and Williams & Connolly at $955,000. But this number is heavily influenced by a firm’s leverage, or its ratio of higher-billing partners to lower-billing associates. For example, 42 percent of Williams & Connolly’s lawyers in Washington are partners, while at WilmerHale that figure is 29 percent. And lawyers caution that, although RPL was once considered to be less subject to manipulation than PPP, the landscape is changing. More firms are using contract attorneys whose work beefs up the bottom line but whose numbers aren’t included in the formula for calculating RPL. Despite the fact that all these metrics are imperfect measures of a firm’s financial performance, the pressure to boost profitability is constant and competition for equity shares gets more and more fierce. To get these numbers up, firms are not only restricting entry to the equity ranks but also pruning the size of their existing equity class of partners. Earlier this year Chicago-based Mayer, Brown, Rowe & Maw announced it was axing or demoting 45 partners — nearly 10 percent of its partnership base. The firm characterized the restructuring as “a difficult but necessary adjustment designed to enhance our position among the world’s leading law firms,” according to a statement it released explaining the move. Although most firms prefer to do their downsizing in a less public way, Mayer, Brown is far from the first firm that’s tinkered with the numbers by weeding out less profitable partners. According to Citigroup’s Law Watch Annual Survey of Law Firm Financial Performance, 8 percent of law firm leaders expect their equity partner ranks to shrink next year, 26 percent expect the number to remain unchanged, 36 percent expect growth of up to 3 percent, and 30 percent of respondents expect that the number of equity partners at their firm will increase by more than 3 percent. In 2006, the equity partner ranks shrank or held steady at nine of the D.C. 20 firms.
Alexia Garamfalvi can be contacted at [email protected].

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