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Even with another record year of profits, it doesn’t take a cynic to wonder whether the legal market has peaked. Perhaps it’s a reporter’s cynicism, but it’s been hard to look at this year’s outstanding financial showing by The Am Law 100 (once again!) and feel surprised. Anyone who’s been covering the legal world for five minutes, let alone years, knows that business has been booming (bring on the IP laterals!) and that firms have been working full throttle. With total gross revenues topping the $26 billion mark in 1999, the Am Law 100 firms gained, on average, 17.5 percent — up from gains of 14.6 percent in 1998. “These numbers are incredibly strong,” says Peter Zeughauser, a management consultant with the Corona del Mar, California, office of ClientFocus. “Even though I think it’s been an incredible year, it’s going to disappoint some people who thought they were going to make ground against other firms and won’t.” Not surprisingly, all things corporate, and in particular all things transactional, have fueled much of this year’s growth. Litigation, especially in the IP area, has also been strong. And lurking everywhere are the technology clients, seeming to move faster than the speed of light. Indeed, if Bill Clinton were on the stump this season, he’d be evangelizing, “It’s the New Economy, stupid.” That explains the strong showings of firms such as Wilson Sonsini Goodrich & Rosati (whose gross revenue was up 37.7 percent), Brobeck, Phleger & Harrison (up 25.3 percent), and Gray Cary Ware & Freidenrich (up 27.3 percent). But old-line firms aren’t dinosaurs yet. Yes, some New York institutions like Cravath, Swaine & Moore; Davis Polk & Wardwell; and Debevoise & Plimpton actually showed a decline in revenue per lawyer. And while that decline could indicate their lawyers are underutilized, it’s just as likely that their new hires aren’t yet up to speed or that the firms have squeezed existing personnel as much as they can. In any case, several other New York mainstays, including Simpson Thacher & Bartlett; Cadwalader, Wickersham & Taft; and Paul, Weiss, Rifkind, Wharton & Garrison showed above-average revenue-per-lawyer gains — an indication that they either got busier or raised their rates and realization, or both. Firms saw strong growth in profitability as well, with many posting double-digit increases (the average gain in profits per partner was 12.3 percent). The likely reasons are higher rates, premium billing, and some trimming of the equity partner ranks. As with gross revenue, several New Economy firms came in well above that average. And last year’s elite coterie of 13 firms earning average profits of $1 million or more per partner can now welcome four new members to their club. Latham & Watkins is the notable newcomer here, being the first California firm to break the six-digit barrier. The others are all New York strongholds: Paul Weiss; Willkie Farr & Gallagher; and Rogers & Wells (these are 1999 numbers predating the merger with Clifford Chance). Still, it may be that the expanding market for legal services has reached its top, given the sluggish stock market and last winter’s associate pay raises. (Since we’re looking here at 1999 financials, any effect so far of these hikes won’t show up until next year’s Am Law 100.) It’s not that the work won’t be there. All year, a litany of law firm leaders and management consultants have repeated the same message like a stuck compact disk: People are still working at capacity, billables to date have far exceeded projections, and even if transactional work slows down, there’s still enough existing work in the pipeline to ward off any dramatic dips for fiscal year 2000. Instead, the constraint is resources. “There are only 8,760 hours in a year, and only so many of them can be billable,” notes consultant Ward Bower of Newtown Square, Pennsylvania-based Altman Weil, Inc. So firms continue to pile on more associates and lateral partners. Of course, Silicon Valley firms are on a hiring spree. But they’re not alone. Since we took count last August, Miami’s Greenberg Traurig has hired 212 lawyers, up 48 percent, says managing partner Cesar Alvarez. And Winston-Salem, North Carolina’s Womble Carlyle Sandridge & Rice, a newcomer to The Am Law 100, has grown to 339 lawyers in the same time period, up more than 12 percent. Womble has been particularly aggressive in Atlanta and in the Raleigh-Durham area, where it’s taken on a lot of banking and New Economy work. “We expanded a lot last year,” says managing partner John Garrou, who credits much of the firm’s growth to nontraditional legal services such as jury consulting, settlement administration, and litigation case management. (The Am Law 100 listings rank firms according to their revenue from legal services, so income from nonlegal ancillary services isn’t included. But we included income from Womble’s nontraditional services because of their legal nature and because profits from them go directly into the firm’s equity pool with traditional revenue from legal fees.) As operational costs continue to rise, maintaining profits will likely become more of a problem. Profit growth in 1999 has slowed slightly from the previous two record years, suggesting that there already is increased pressure on margins. There will be even more next year as firms expand or face lease renewals in a tight market. Staff costs, particularly for information technology employees, are also on the rise. And then there are those associate salary increases. It is still too early in the year to get a definite feel of the potential effect of the hikes. But it would appear that if business continues at its brisk pace, the bigger New York and California firms are likely to absorb much of the blow without great damage, thanks to their premium billings and the volume of work already in the pipeline. Firms elsewhere may take a harder hit, though, especially if they can’t ratchet up billable hours. And with client pressure against it, there’s not much margin left to increase rates. “We have tried very hard to restrain ourselves from raising our rates,” says R. Bruce McLean, chairman of Akin, Gump, Strauss, Hauer & Feld. Instead the firm is trying to cut costs by recruiting more full-time nonpartner track staff lawyers. Naturally, the numbers don’t always tell the whole story. This year’s biggest gainer in profits per partner was San Francisco’s Graham & James, a firm that has been struggling for some time and which would probably have dropped off The Am Law 100 had it not received a contingency fee exceeding $30 million in a patent case. That fee, together with the defection of 43 equity partners last year, boosted the firm’s rankings. While the gross went up only 7.8 percent, profits per partner bounced up 157 percent, and revenue per lawyer was up 44 percent. Without dramatic action, such as its merger with Cleveland’s Squire, Sanders & Dempsey, expect a different story about the firm’s results next July. Mergers boosted two firms onto The Am Law 100 this year — Dallas’s Locke Liddell & Sapp (joining Dallas’s Locke Purnell Rain Harrell with Houston’s Liddell, Sapp, Zivley, Hill & LaBoon) and Rochester, New York’s Nixon Peabody (joining Rochester’s Nixon, Hargrave, Devans & Doyle with Boston’s Peabody & Brown). Two firms already on the list, Baltimore’s Piper & Marbury and Chicago’s Rudnick & Wolfe, moved up the ranks by merging with each other. This merger trend did not bode well for firms with less aggressive growth strategies, such as New York’s Hughes Hubbard & Reed. Though it posted increases in all of our charted categories, its gross revenue wasn’t strong enough to keep it from falling off the list. “We made a strategic decision last summer that we were going to grow, but grow smart,” says chair Candace Beinecke. “Our strategy is not to focus on revenue growth alone. … If you’re growing too fast, you’re just not going to be able to maintain quality.” Still, Beinecke admits, the slow-growth strategy hasn’t stopped her from fielding the numerous calls from potential merger partners. “We always listen,” she says. “But we really believe that we are doing the right thing for ourselves.” That strategy may be prescient, especially if the market takes a dive. Check in with us again next year. Related Chart: Am Law 100 Index Return to Amlaw 100

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