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Morgan Lewis & Bockius and Dechert are forever lumped into a tier of their own in Pennsylvania � albeit not a bad place to be when the tier is considered by most in a league above the rest. The recently released AmLaw 100 numbers show the firms widening the gap between themselves and other large Pennsylvania firms, with the exception of maybe Reed Smith. There is also a gap, however, between how Dechert and Morgan Lewis are managed. The firms have shown that there are different ways to be profitable, but will Morgan Lewis have to start acting a little more like Dechert if it wants to reach its tier-mate’s profitability numbers? Over the past few months, Dechert has made no secret of its interest in shedding practice areas, clients and attorneys that do not meet its profitability model. In late February, the firm lost its 13-attorney state tax group to Reed Smith, which included eight associates. Dechert Chairman Barton J. Winokur said then that the group was different from many of its other practices and he had no interest in turning it into a national practice. First Amendment attorney Amy B. Ginensky left Dechert in January for Pepper Hamilton. Winokur said at the time that the economic pressure on media clients had made it harder to run a media practice at the firm. It would have been difficult for Ginensky to remain at Dechert and stay concentrated on media work, he said. Pepper Hamilton has since acquired other Dechert attorneys, including media lawyer Michael E. Baughman, commercial litigator Marshall J. Walthew and associate Lance Rogers. Similar stories coming out of Morgan Lewis seem nearly impossible to find, at least in the Philadelphia area. Michael Coleman of Coleman Nourian said he isn’t aware of Morgan Lewis shedding any practice areas, but said the approach of re-examining a firm’s product line makes good business sense. He said he would think any firm that is showing profits per equity partner of $1 million or more � which includes both Dechert and Morgan Lewis � is doing just that. Dechert declined to comment for this article. J. Gordon Cooney Jr., managing partner of Morgan Lewis’ Philadelphia office, said the practice areas being shed by other firms are probably profitable, but maybe not the most profitable. He said his firm’s business model does not require handling only the most profitable work for all of its clients. Instead, the firm looks to have a broad range of services available to all clients to help maintain longstanding relationships, Cooney said. While some firms have been dropping labor and employment attorneys, for example, The American Lawyer named Morgan Lewis’ labor and employment group “department of the year” in that category in 2006. Cooney said the group handles a mix of lower and higher billable-rate work within that practice. Coleman said it could be that Dechert and Morgan Lewis just have different end goals, with Morgan Lewis focusing on a longer-range plan, while Dechert wanted to become more profitable faster. As Morgan Lewis focuses on higher-end work in some of the practices areas that other firms are shedding � such as the oft-mentioned real estate “dirt law” � Coleman said the firm could be trying to salvage the practice as a whole while slowly moving away from less-profitable matters. Overall, Cooney said Morgan Lewis has a longer-range plan that includes being competitive on a global scale while at the same time maintaining a strong base in the mid-Atlantic and Philadelphia regions. “The legal profession goes in cycles and what is hot now may not be hot in three years � and focusing exclusively on the highest billable rate now � is not necessarily the best strategy over the longrun,” Cooney said. There are three basic reasons why Morgan Lewis has avoided shedding wholesale practice areas, he said, with the cyclical nature of the profession included. Having a broad geographic reach and practice-area depth has been important to maintaining long-term relationships with clients, he said. Using client teams across practice-area and office boundaries has also been more successful when the firm isn’t as focused on the rates of each subgroup or office, Cooney added. Morgan Lewis, 12th on this year’s AmLaw 100, has 300 more attorneys and nearly $200 million more in gross revenue than does 24th-place Dechert. The numbers go the other way when you look at PPP. Dechert has $1.985 million in PPP for 2006 while Morgan Lewis has $1.24 million. The firms’ revenue per lawyer (RPL) are somewhat compatible, with Morgan Lewis averaging $770,000 in RPL and Dechert at $810,000. According to Coleman, firms with similar RPL � a figure many say is the surest sign of a firm’s health � should theoretically be able to have similar PPP. Bill Brennan of Altman Weil said Morgan Lewis and Dechert might just have different strategic plans that place differing importance on profitability. He said Morgan Lewis might have a goal to have a higher number of lawyers with a broader geographic reach that would not allow for a focus on just profitability. As it now stands, Dechert’s plan is making it more profitable than Morgan Lewis � about 60 percent more profitable when looking just at PPP. If the leverage of the two firms is taken into account, about 12 percent of Dechert’s 60 percent increase can be explained away, Brennan said. Dechert had a total of 898 attorneys in 2006, including 169 equity partners, giving the firm leverage of 5.3 to 1. Morgan Lewis had 1,198 attorneys in 2006, including 254 equity partners, giving it a leverage of 4.7. There’s a 12.7 percent difference in the two firms’ leverage. While there are five main drivers to law firm profitability � pricing, leverage, expenses, realization and billable hours � Brennan said it is most likely pricing that is causing the difference in profitability between Morgan Lewis and Dechert. Because both firms are well managed and most firms have become better at managing expenses and realization rates, Brennan said pricing and possibly leverage stand out as the most obvious reasons for the disparity in profits. Taking an even harder look, Brennan said considering the firm’s average compensation for all partners (CAP) takes out any distortion that could be factored into the PPP because of partner tiers. Dechert’s CAP for 2006 was $1.45 million, compared to Morgan Lewis’ CAP of $915,000. Those numbers would make Dechert about 58 percent more profitable. If Morgan Lewis could increase its RPL by 5 percent or $40,000 to match that of Dechert’s, Brennan said that would add almost $48 million to its gross revenue and bring its PPP to about $1.4 million. He said the difference in RPL between the firms could be explained by pricing differences. If the RPL was matched, the remaining difference in profitability � 39 percent � could be explained by expenses and leverage. Industry insiders were hesitant to venture a guess as to which business model would come out on top. There are several consequences of any business model on a firm. Financials can play into the success of lateral recruiting and a business plan could affect the culture and morale of a firm. Consultant Joel A. Rose said there are philosophical differences among firms that often dictate their business models. A firm where partners have more of a business relationship than a fraternal relationship often see a faster rate of return on their work, whereas a firm with more of a traditional, fraternal structure may not be as quick to shed practices or see big increases in profits, he said. “Morgan has more of a philosophy that �we’re willing to ride with our partners [who] are in less profitable practice areas’ � as opposed to those firms that are taking a more hard-nosed business look at this,” Rose said. The ideal situation, he said, is for partners in firms to find a balance between the two approaches.

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