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First, the good news: Law firms didn’t go the way of the dot-coms last year. As was the case with The Am Law 100, the nation’s 100 highest-grossing firms, The Am Law Second Hundred posted relatively strong results last year, as firms coasted on work that began before the economic downturn hit. Gross revenue for the Second Hundred increased an average of 12.2 percent from 1999 (compared to 17 percent for The Am Law 100), while average profits per equity partner in 2000 increased by 11.9 percent (outpacing those of The Am Law 100, which had a 6.5 percent gain). But despite the growth, the squeeze is on. Profit per equity partner averaged $444,850 at Second Hundred firms, almost half the per-partner average of $801,350 at Am Law 100 firms. In addition, 19 of the Second Hundred firms had a decrease in profits per partner, while another 21 failed to match The Am Law 100′s average profits-per-partner increase. The lower numbers will put these firms at a disadvantage in an increasingly segmented market in which 48 Am Law 100 firms posted per-partner profits at or above $700,000, while 49 Second Hundred firms posted per-partner profits of $400,000 or less. “It’s going to become increasingly difficult for those [less profitable] firms to attract the best people, because the economic gap is too big,” says Hildebrandt International director Lisa Smith. “If you’re going to make a significant commitment to a firm and to your career, do you want to get $300,000 or $700,000 for it? Economics aren’t the only thing driving a career, but at some point it’s a factor. And some of these very profitable firms are very nice places to be.” Peter Zeughauser, a legal consultant for ClientFocus, is more blunt about the fate of Second Hundred firms whose profitability didn’t keep pace with The Am Law 100: “They need to identify what’s wrong and fix it quickly. They’re in the emergency room on life support. If your core practice areas are ones that are performing well industrywide and you didn’t keep pace, you really have to look hard at what’s wrong and be worried about cherry-picking.” So what’s the prescription? Jettisoning deadwood could help. So might raising rates, though it may be too late to make that move given the economic downturn. It might also alienate clients who don’t expect to pay Am Law 100 prices to Second Hundred firms. Of course, a firm doesn’t necessarily have to be big to make money — consider Washington, D.C.’s 155-lawyer Dow, Lohnes & Albertson, which ranks as number 146 among The Am Law 200 in gross revenue but 21st in profits per partner, thanks to its strong transactional practice representing media and communications companies. Still, most general-practice Second Hundred firms that want to move up will probably need to add bulk in their core or most profitable practice areas. “There are growth imperatives in the law business,” says Altman Weil Inc. principal Ward Bower. “Good people aren’t going to join a firm that’s going nowhere. You can’t keep them if you can’t provide opportunities.” Even Second Hundred firms that are doing well can’t afford to be complacent. Just ask Howard Ayers, managing partner of 230-lawyer Andrews & Kurth, one of Houston’s largest firms. His firm had record growth and profits in 1999. But that didn’t stop the defection of 22 lawyers last year, including a group of 11 corporate partners who joined crosstown rival Vinson & Elkins. Those defections kept the firm’s gross flat, while associate pay raises drove profits down 3.4 percent last year. In the meantime, about 30 to 35 merger-minded firms, many of them national or international, came calling on Andrews & Kurth, says Ayers. But the firm, worried about losing its culture by linking with a large firm, decided instead to take on a smaller partner: In June it announced plans to merge with Houston’s 105-lawyer Mayor, Day, Caldwell & Keeton. “I think the pressure that both of the firms felt was [about] scale,” says Ayers, who anticipates that the two firms’ combined revenues will push the newly merged entity into The Am Law 100 next year and make it easier to hire laterally in the firm’s offices in London, New York, and Washington, D.C. Certainly, some of the firms that made impressive climbs up the gross revenue rankings this year, such as Philadelphia’s Drinker Biddle & Reath and Schnader Harrison Segal & Lewis, owe their movement to aggressive expansion in lawyers. But beware of growth for growth’s sake. “Expansion is expensive,” warns Zeughauser. For firms looking to grow beyond static markets like that of Philadelphia, thorough research is crucial. As firms rush to open outposts in New York, home of the premium fee, they overlook other potentially profitable cities. “Boston has not been invaded,” Zeughauser says. “If you look at the numbers, it’s a pretty attractive market.” If that’s true, one firm that is ahead of the curve is Schnader Harrison, which merged last year with Boston’s 50-lawyer Goldstein & Manello. The union had been initiated by a consultant working with Goldstein & Manello, says Schnader Harrison managing partner Jerald Goodman. “[Boston] wasn’t particularly a market we were looking at,” he admits. Nevertheless, Schnader Harrison had wanted to balance its existing strength in litigation, so it grabbed at the opportunity to merge with Goldstein, which has a strong transactional practice. Schnader Harrison also took on 45 lawyers from Philadelphia’s Mesirov Gelman Jaffe Cramer & Jamieson last year. Although the added costs of new partners and long-term capital investments drove profits per partner down 6.9 percent, the overall boost in lawyer numbers boosted the gross to $103.5 million, a 33.4 percent increase. The fast growth of firms such as Schnader Harrison pushed others down or off the Second Hundred. One notable drop-off this year is Miami’s Steel Hector & Davis. Managing partner Joseph Klock says he’s not worried. “You have a whole bunch of firms merging,” he says. “We’ll just have to deal with that the best we can.” They’d better. A number of Steel Hector partners, including Jose Astigarraga, head of the firm’s international litigation and arbitration group, defected during 2000. Those departures, coupled with associate attrition, lowered the firm’s total number of lawyers to 139, a 10 percent decline from the previous year. With fewer lawyers, the firm’s gross revenues remained flat in 2000. Meanwhile, a 37 percent increase in the number of equity partners ate up the 22 percent rise in the net and pushed average profits per partner down nearly 12 percent. The firm did raise associate salaries, but Klock says the pay hikes didn’t cut into the bottom line: “They worked harder.” What about the more pleasant working conditions that many Second Hundred firms tout? “It doesn’t matter how happy you are about how much you are making,” Zeughauser says. “[The question is] how much do you need to make to attract the kind of talent you need to keep your firm going?” Partners at Denver’s Holland & Hart, for instance, are content to be a regional firm that keeps manageable hours and offers unique perks, like a paid sabbatical program for partners. But associates have fled at an uncomfortably high rate. Looking ahead, firms with lagging profits may be buffered somewhat from the economy’s decline, since their growth was less driven by the technology sector than was that of some of the Am Law 100 firms. “The fact that the [IPO] market dried up has little impact on these firms,” says Hildebrandt’s Smith. Similarly, many Second Hundred firms are not as affected by the drop in large-scale M&A work as their Am Law 100 counterparts are. So what are we likely to see in next year’s review of The Am Law Second Hundred? Choose your analysis. One school of thought is that less work will trickle down to these firms in economic hard times. “As big firms need to fill their plates, they’ll keep more work,” Smith says. A competing view is that as companies tighten their belts, many of the Second Hundred regional firms may actually benefit, thanks to their lower fees. “That is one silver lining in the clouds for the Second Hundred firms, especially the underperforming ones,” says Zeughauser. But even that rosy scenario has its dark side. “The problem is that’s going to be low-end work,” he says. “It’s just going to marginalize [those firms] further into the second tier.” In other words, it’s hardly what the doctor ordered. Related Charts: Slower Growth in the Second Hundred Second-Tier Gross, First-Tier Profit Growth Moving In, Sliding Down, Falling Off The Other Shoe Has Yet to Fall For Profits, a New High In Pro Bono, Big Isn’t Always Best

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