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James Burns Jr. gushed a bit when he talked about the numbers. And why shouldn’t he? His firm, San Francisco’s Brobeck, Phleger & Harrison, posted mammoth gains last year. Its gross revenue rose more than 50 percent, and its partners’ take-home pay increased by more than a third. “A number of things definitely came together for us last year,” says Burns, the firm’s managing partner. But to reach those numbers, Brobeck grew massively. It has expanded 60 percent since early 1999. Last year alone it hired 272 laterals, in addition to a class of 65 first-year associates. Brobeck now has offices in 11 cities and pays starting associates a salary of $135,000, plus a discretionary bonus as high as $35,000. With IPOs in the tank, M&A in the doldrums, and skyrocketing investment portfolios a distant memory, is there enough fuel to feed this machine? Burns says yes, spinning a rosy scenario of rebounding markets. But the assessment of the managing partner of another big West Coast outfit may be closer to the mark: “If I can just keep us level this year,” he says, “my partners will think I’m a miracle worker.” Though Brobeck is an extreme example, its story reflects the general trend among Am Law 100 firms, where lawyer counts have grown, on average, about 9 percent to 10 percent per year since 1998. With lots of new mouths to feed in a suddenly soft economy, firm leaders are facing their biggest managerial challenges in almost a decade. But don’t look for much evidence of crisis in this year’s charts — most firms are just now starting to feel the pinch. Instead, our survey of last year’s numbers shows firms at the apex of profitability, bathing in the afterglow of the country’s largest-ever peacetime economic expansion. In 2000, gross revenue among The Am Law 100 rose an average of 19.5 percent, and profits per partner grew an average of 10.2 percent. Yet even last year some firms were already cresting the summit for the glide down, with exploding associate costs eating into partnership profits. Partners at firms that didn’t achieve double-digit revenue growth last year generally saw their take stay flat or fall. Ever resourceful, many firms are engineering a way out of this trap. In the process they have coined a new word for the American business lexicon — “de-equitization.” In firm after firm on our Am Law 100 charts, healthy growth in revenue was paired with a healthy decline in the number of partners showing up for those Saturday morning get-togethers. Take a look at San Francisco’s Heller Ehrman White & McAuliffe. Last year it posted a 33 percent growth in revenue and added 110 lawyers to its associate ranks. But the number of equity partners fell from 144 to 138, while the number of nonequity partners more than doubled to 38. The blood-letting was even more intense at Morgan, Lewis & Bockius. Revenue rose 20 percent, while 20.7 percent of the equity partners left, retired or were moved downstairs, helping to swell the firm’s nonequity ranks to 68 lawyers. Even New York’s Shearman & Sterling got into the act, freezing its equity partnership at 163 but more than doubling its number of nonequity partners to 24. The short-term effect of these shifts was great: Partners at these firms took home, on average, an extra $170,000. But as a long-term strategy, can firms really shrink their way to greater profitability? You bet, says Joel Henning, senior vice president of the consulting firm Hildebrandt International. “Frankly, in the ’80s and ’90s, many lawyers who should have remained employees were voted into ownership,” Henning says. “They may work hard and be perfectly good employees, but they don’t add value as owners.” Henning says he’s worked with several clients who have de-equitized or are planning to de-equitize partners. If cuts are necessary, Henning believes that de-equitizing is a preferable alternative to the associate layoffs many firms made during the industry’s last big downturn. “In the early’90s, a lot of firms cut into bone, not fat, and it hurt them,” he says. Some firms are bucking the de-equitization trend. Andrew Friedman, a partner at Washington, D.C.’s Covington & Burling, says that his firm has never considered de-equitizing and never will. “When you are a partner here,” he says, “you are a partner for life.” Friedman says that creation of a class of nonequity partners is antithetical to the idea of a true partnership. Others dismiss de-equitization as a short-term solution: “If we just stood still, this year’s numbers would improve. That’s easy,” says Irwin Heller, managing partner of Boston’s Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. Heller says that cutting down the number of partners might boost profits for a year or two, but in the long term it suppresses growth. Francis Milone, Morgan Lewis’ chairman, rejects that premise. For his firm, he says, de-equitization was simply a question of the bottom line. “Across the board we didn’t have the kind of performance we felt we needed,” he says. As part of a broad restructuring program, the firm achieved a net reduction of 60 equity partners last year: 24 through de-equitization; the balance by not replacing a number of departing or retiring equity partners. With revenue rising, and more points available to divide among fewer partners, Morgan’s profits per partner soared. The partners also voted to make rising associates nonequity partners, but on a shortened seven-year track, with an additional, two-to-five-year track to become full equity partners. De-equitized partners can also become full partners again if their performance merits it, but Milone says no one has made the jump back in yet. Milone says that the politics of de-equitization are delicate: “It was done at a high level and was nontransparent. Generally, people don’t know who the fixed-allocation partners are.” Though many partners had initial misgivings about the changes, he says, they ultimately concluded that the firm should be generating substantially higher profits given its client base. “To do that, you have to make some hard decisions,” Milone says. “You try to do it in a humane way, and I don’t think we’ve lost any motivation and engagement by the partners.” Even without the de-equitization, Milone notes, the firm would have shown substantial growth in profits this year. (Morgan Lewis’ average compensation for all partners rose about 28 percent last year). One result of the de-equitization trend has been an increasing spread in recent years between average profits per equity partner and average compensation — all partners, which measures compensation to all partners, both equity and nonequity. A sizable gap suggests a large disparity between compensation to equity and nonequity partners, and at some firms, the divide is dramatic. At Chicago’s Kirkland & Ellis, average compensation is 36 percent lower than profits per partner. The spread is similar at Boston’s Bingham Dana and New York’s Winston & Strawn. And for some firms the gap is growing. At Cleveland’s Squire, Sanders & Dempsey, average compensation fell about 9 percent despite 5 percent growth in profits per partner. Merger and practice-group acquisition were other popular methods for achieving growth last year. Miami’s Greenberg Traurig added more than 100 new partners and posted 62 percent revenue growth, in part by acquiring the New York office of San Francisco’s now-defunct Graham & James. Duane, Morris & Heckscher vaulted into The Am Law 100 for the first time by adding 40 lateral partners and increasing gross revenue by 34 percent. But did the additional cash enhance the bottom line? Not much at Greenberg, where profits per partner increased about 5 percent. But after Howrey & Simon acquired the IP boutique Arnold, White & Durkee last year, the combined firm performed spectacularly, posting a 41 percent increase in gross revenue and boosting profits per partner by a third. Howrey’s managing partner, Ralph Savarese, attributes the growth to a clean mesh between the two firms’ high-end patent litigation practices and the jettisoning of low-end litigation work, such as antidumping cases. “It’s fundamental economics,” Savarese says. “When you are asked to do something routine, you make less with lower realization. When you do something unique, fees and realization are much higher.” Last year also saw the continuation of the growth of San Francisco area firms. A side-by-side comparison of the highest-grossing East and West Coast firms shows the Northern Californians clobbering their Manhattan counterparts in rate of gross revenue growth. The story was much the same in profits per partner, where partners at some New York firms took a bit of a haircut. The combination of a sluggish year-end deal market, big jumps in associate salaries and bonuses, and expanding partnership ranks caused profits per partner to stay flat or decline slightly at such firms as Skadden, Arps, Slate, Meagher & Flom; Sullivan & Cromwell; Wachtell, Lipton, Rosen & Katz; Cahill Gordon & Reindel; and Willkie Farr & Gallagher. (Despite the trim, the median take for equity partners at the highest-grossing New York firms was still $700,000 greater than at the Bay Area leaders.) The top firms on both coasts showed only modest growth in revenue per lawyer. Among the New York leaders, increases in revenue per lawyer moved in step with increases in gross revenue. But among the Bay Area firms, the gaudy rises in gross revenue and profits per partner were mainly a function of old-fashioned leverage, not new-fangled profitability. At Brobeck the 50 percent rise in gross revenue produced only a 13.4 percent uptick in revenue per lawyer. Cooley Godward’s 62 percent growth in gross revenue produced only a 16 percent rise in revenue per lawyer. And at Wilson Sonsini Goodrich & Rosati, the bell cow for Palo Alto firms, 52 percent more gross yielded only a 2.6 percent rise in revenue per lawyer. Translation: There might have been a lot more lawyers at the Bay Area firms, but they weren’t a lot more productive. The biggest gain in profits per partner last year occurred at New York’s Kelley Drye & Warren, where equity partners received a whopping 46.2 percent pay hike, on average. “Timing is everything in life,” says managing partner Merrill Stone, who attributed the jump to the completion of several large project finance deals, including an Italian telecom project, and the resolution of several long-running litigations, such as a big suit against General Motors Corporation. “Not getting paid on projects in prior years had depressed our growth,” Stone says. Last year’s steepest dip in profits per partner occurred at New York’s Brown & Wood, which was acquired earlier this year by Chicago’s Sidley & Austin. Former Brown & Wood partners say the decline had more to do with the good year the firm had in 1999 rather than any disasters last year, but they concede that fin-de-siecle ennui also contributed, as partners confronted the demise of the 87-year-old firm. Brown & Wood may be no more, but at least its partners got equity after the merger. Two of the founding members of Brown & Wood were recruited in 1914 from New York’s Winthrop, Stimson, Putnam & Roberts, which also leaves the survey this year. An elite outfit on Wall Street before Skadden Arps was even a gleam in Joseph Flom’s eye, the firm has long been in decline. Early this year the firm, New York’s version of the Ottoman Empire, was finally captured by upstart barbarians from the West, merging with San Francisco’s Pillsbury Madison & Sutro. Winthrop Stimson makes its final appearance next month in The Am Law Second Hundred. Also gone this year is New York’s Rogers & Wells, which was subsumed by the British colossus Clifford Chance in 1999. The merger sparked talk of a spate of Anglo-American marriages, but they’ve failed to materialize. Perhaps word of the rocky start of the Clifford Chance-Rogers & Wells union filtered out. In May, the British publication The Lawyerreported that outraged Rogers & Wells partners were threatening to mutiny rather than accept pay cuts. No word on whether the Yanks have tossed any tea into New York Harbor, but as more and more firms diligently polish the brass in hopes of attracting a mate, it might be time to recall an adage your grandmother probably taught you: “Marry in haste; repent at leisure” (or was it “Marry for money; earn every penny”?) Still, there is no mistaking that the increasing number of big-firm mergers is part of an overall trend toward gigantism among American lawyers. In 1995 the number of Am Law 100 firms with more than 500 lawyers was 17. Last year it was 45. But in a weakening economy, increased size and leverage can rapidly become an albatross, dragging down performance and profits. “The final effect will probably be known in the July-this-year-to-July-next-year period,” says Cooley Godward managing partner Lee Benton. “We are all committed to fairly large classes. If you get 50 more heads to feed and you don’t increase business — ” Benton dismisses the thought even before he can complete it. “ It’s hard to believe you won’t get a turnaround in that time.” And balloons stay inflated forever. Related Charts: Up and Out: Newcomers and Dropouts East Versus West: New York vs. Bay Area Firms Softening Profits: The Rise and Fall of Revenue and Profits Trimming the Ranks: Slashing Equity Partners, Raising Revenue Profits Per Equity Partner: Biggest Increases Gross Revenue: Biggest and Smallest Increases

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