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“If you focus on a specialty and on quality,” offered Gordon Davidson, the chairman of Palo Alto’s Fenwick & West, “you can operate in the same rarefied air as larger firms that are not as focused.” He was attempting to explain how his firm had parlayed its gross revenue for 1999 — $101 million, which ranked it at 129 in The Am Law 200 — into a very respectable $645,000 in profits per partner, which ranked it fifty-second by that measure. “We’re a little like Wachtell,” Davidson suggested. Funny. It was the third time in three interviews that Wachtell had come up, as Am Law 200 firms tried to define their place in the Am Law firmament. It made a certain amount of sense. There is an identifiable cluster of eight firms within the Am Law “Second Hundred” whose profits per partner in 1999 — ranging from $615,000 (Los Angeles’s Irell & Manella) to $780,000 (New York’s Pennie & Edmonds) — have put them among the top 60 Am Law-ranked firms in this category. As a group, these firms dispel any notion of the Am Law Second Hundred as simply a holding pen for merger-ripe wannabes and also-rans. The message delivered by these firms’ profits per partner rankings is clear: Gross revenues are big and splashy, but they don’t come close to telling the whole story. In fact, you could call this group of firms the Wachtells of The Am Law 200: focused, lean, and highly profitable despite their size. It’s an imperfect comparison — though generally small compared to others on the Am Law charts, all but one of the firms actually have more lawyers than Wachtell, and most are more highly leveraged. And few, if any, owe their profitability to Wachtell-style premium billing. But it’s one way to explain how certain Am Law 200 firms manage to spin revenue into equity more efficiently than others do. So, how do they do it? The calculus isn’t easy. Understanding how Wachtell works its magic year after year is as elusive as the secret formula behind Coca-Cola, and it’s much the same for these firms. They are all centered in the country’s top money markets to be sure, which makes it easier to rake in top-tier billings. But big cities also mean big overhead: fancy skyscraper leases and the pressure to pay out top-dollar associate salaries. (Every one of the firms matched the recent associate pay hikes in their market.) Weighing in as some of the smallest firms in The Am Law 200, they enjoy no economies of scale. And despite stellar profit performance two years running, six of the group posted 1999 per-partner profits that, when compared to last year’s results, fell below the national average of 9.7 percent growth. Then again, so did Wachtell. But common themes animate these success stories. The most important is also the most obvious: specialization, specialization, specialization. Firms that home in on one or two specialty practices, says Joel Henning, the head of the Chicago office of Somerset, N.J.’s Hildebrandt International, “are better at developing systems for getting work done cost-effectively.” Because highly focused firms know what they’re doing so well, he adds, “they spend less time inefficiently having to learn things that they can’t charge to the client. And they can charge competitive rates because the market has stratified, and they aim for, and can stay in, the higher strata.” Using that measure, it’s not too surprising that New York intellectual property firm Pennie & Edmonds posted the highest profits per partner of any Second Hundred firm — $780,000 — ranking thirty-second on the Am Law charts. “Efficiency is the watchword,” says firm policy board member Jon Marshall, who notes that Pennie & Edmonds recently specialized its practice even further by breaking the firm into three different intellectual property practice groups. Fish & Neave, a second New York IP-only firm, is close behind, with an average of $700,000 per equity partner. “We are ferociously busy,” says Jesse Jenner, who took over as Fish & Neave’s managing partner on June 1. With IP work at an unprecedented premium, both firms are reaping the benefits of their expertise. Jenner points to preparation for the Amgen-v.-TKT litigation, which he calls the biotech case of the decade, as an example of why the firm’s profits are skyrocketing while firm growth remains slow and steady. Other firms have proven that IP is not the only reliably profitable niche practice. Washington D.C.’s Williams & Connolly, a firm largely dedicated to federal trial practice, ranked fifty-sixth in the nation last year for profits per partner. George Kahale III, managing partner of New York’s Curtis, Mallet-Prevost, Colt & Mosle, credits his firm’s “star-caliber” litigation and international law practices with propelling the firm’s per-partner profits. “We have two drivers in the firm that give us some distinction, otherwise it would be hard to compete against the behemoths,” he says. The firm reported average equity takes of $655,000 per partner, ranking fifty-first on Am Law’s 1999 list. Other high-equity Second Hundred firms have concentrated less on a specific practice, and more on a specific species of client. The strategy and effect are the same: “Do very good knitting, and stick to your knitting,” says Henning of Hildebrandt. Palo Alto, Calif.-based Fenwick & West specializes in work ranging from the standard Silicon Valley IPO to complex international tax litigation — all for a fairly uniform high-tech clientele. Los Angeles’s Irell & Manella, whose profits per partner last year were $615,000, is benefiting from a singular focus on the high-tech industry. In 1999 the firm, which is one of the only non-Silicon Valley outfits that has a long history of taking equity in its clients, served up high-profile M&A deals for the likes of Microsoft cofounder Paul Allen and broadband provider Broadcom Corporation. Of course, there are exceptions to the rule. Scott Rosenblum, managing partner of New York’s Kramer Levin Naftalis & Frankel, says that 1999 profits were driven by every department at the full-service firm. Although he says the firm’s corporate, bankruptcy, litigation, and IP practices were especially strong (the firm imported a group of IP specialists from the much larger Clifford Chance Rogers & Wells in 1998 that became “very profitable” in 1999), the firm was able to post the profits it did — $710,000 per partner — by paying very close attention to the bottom line. “What counts today is excellence in lawyering,” says Rosenblum. “But you can’t just watch the revenue side. We run a very tight ship, in terms of watching what we’re doing. We really watch the fat, in that we try not to have any.” That the firm had seven more equity partners in 1999 than the year before makes its ability to pump up its profits per partner even more impressive. Los Angeles-based Munger, Tolles & Olson, the firm with the smallest lawyer-count on The Am Law 200, logged a reported $660,000 per equity partner in 1999 — the forty-ninth-highest among Am Law-ranked firms. But the firm’s heads, who admit to charging slightly lower rates than their L.A. competitors, can’t pin the firm’s success to any one practice. Instead, the firm chalks up its recent performance to other, notably Wachtellian characteristics. “Our low leverage [the firm reported 63 equity partners and 67 associates last year] and short track [ranging from four to seven years] mean that we attract talented lawyers, enabling us to focus on unique, high-end projects,” explains Ruth Fisher, co-managing partner of the firm. “We don’t do commoditized work,” she adds. “No one’s doing the same thing over and over again, so we don’t have to keep that pipeline full to be successful.” And the price of their success? Being a small firm with robust profits can have its downside. For one thing, the M-word is always looming, and the pressure to grow quickly — through merger or otherwise — is both generally unwelcome and ever present. “We’re proud of our relative smallness,” says Fenwick’s Gordon Davidson, whose firm hovered above the 200-lawyer mark last year. “In terms of deals per pound, we think we’re doing well. Last year we grew 18-20 percent [in number of lawyers]. We could have done 50.” For another thing, churning out stellar profits while reining in growth often takes a predictable toll on associate billings, with predictable results. Fish & Neave’s Jenner notes that the firm has performed badly in recent Am Law associate surveys. But it is not alone. In 1999 Curtis, Mallet-Prevost finished dead last for New York firms; Pennie & Edmonds finished a close second. Naturally few have time to devote to the public interest: With the exception of Kramer Levin, the firms with the highest profits per partner on The Am Law 200 all logged much-lower-than-average pro bono hours. (Pennie & Edmonds and Williams & Connolly refused to provide their pro bono numbers.) But regardless of how they swing it, competing successfully against their bigger, higher-grossing brethren endows this pack of eight with a sense of momentum that bodes well for future balance sheets. “There’s a lot to the idea that success breeds success,” concludes Curtis, Mallet-Prevost’s Kahale. In the early analysis, the secret might be just that simple. Just ask Wachtell. Am Law 200 Index

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