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If 2000 turns out to have been the crest of the New Jersey legal market before the current economic slowdown jostles the big firms, it was a hell of a high-water mark. Most of the state’s 20 top-grossing firms capitalized on what appears to be the last year in this unprecedented cycle that began in the early 1990s. Total revenues of all 20 firms jumped by more than 9 percent, and their profitability climbed to a record just one year after a modest dip. While that record — a 7.7 percent jump in average profits per partner, to $396,500 last year from $368,500 in 1999 — was accomplished in part by higher billings and controlled costs, good old-fashioned leverage played a critical role. How critical? For the first time since 1994, the number of equity partners at the top firms dropped. And while that drop involved only five equity partners, only 11 of the 20 firms named more equity partners, while five firms showed a decline and the remaining four stayed flat. Put another way, the ratio of lawyers to equity partners, known as leverage, reached a nine-year high of 2.99 as 11 of the firms reported having a two-tiered partnership, up from eight a year earlier. Leading the leverage parade is the same trio as usual: Teaneck’s DeCotiis, Fitzpatrick, Gluck, Hayden & Cole, 5.86; Porzio, Bromberg & Newman of Morristown, N.J., 5.73, and McElroy, Deutsch & Mulvaney, also of Morristown, N.J., 5.0. At the other end are the two firms that have never bought into the leverage game, Wilentz, Goldman & Spitzer of Woodbridge, N.J., and Connell Foley of Roseland, N.J., both with ratios of less than 2.0. “More and more firms are publicly drawing that line [between equity and non-equity partners], acknowledging that there already was an artificial line within their partnership, with some partners really reaping the profits as opposed to younger ones,” says Richard Hellstern, CEO of a law firm consulting business in Bloomfield, N.J. The challenge, then, more than previously, is how to reward and retain talent while keeping the partnership relatively small. That is being accomplished by giving higher salaries and incentive payments to non-equity producers and by giving titles to mid-tier players to help them keep clients and attract business. Those titles include “partner” as well as all the permutations of “counsel” imaginable. In fact, the number of lawyers in the top 20 firms with special titles jumped 10.45 percent from 1999, to 222, which is close to 10 percent of the lawyers in those firms. The ranks of counsel have been growing for several years. And while some counsel, or of counsel, are retired equity partners or judges, the majority are lawyers who moved out of the associate ranks or who are lateral hires and are in that mid-ground below the equity line. The firms doing this are following a national trend that began in the mid-1980s with Cleveland’s Jones, Day, Reavis & Pogue, which pioneered the concept of permanent senior associates. Roseland, N.J.’s Wolff & Samson began using the title “senior associate” in 1999 and now has a half-dozen lawyers with the title, along with six of counsel. “We don’t have an up-or-out system,” says Peter Frazza, co-managing partner of the Short Hills, N.J., firm of Budd Larner Gross Rosenbaum Greenberg & Sade, whose 15 counsel positions constitute a fifth of the firm. Frazza says no new equity partners were made this year, but the firm has brought in 30 laterals in the past 18 months, including nine with more than 10 years of experience. DIAMONDS AND DE-EQUITIZATION This phenomenon is captured by two buzzwords, one old and one more recent. The old word is “diamond,” meaning that firms look fatter in the middle. Conversely, they are leaner at the top, where equity partners are, and at the bottom, where first-, second- and third-year associates are. Budd Larner, for instance, had only two freshmen associates last fall, though the firm will welcome seven in September because there is work for them to do. The idea, in part, is to have someone else train lawyers for you, though the risk is that your own firm could suffer if your lawyers are not trained aggressively. The new, more self-explanatory buzzword is “de-equitization,” which means dropping equity partners. Law firm consultant Joel Henning, a senior vice president with Hildebrandt International of Somerset, N.J., told The American Lawyer, a magazine affiliated with the New Jersey Law Journal and with law.com, in its July “AmLaw 100″ issue, that some firms can shrink their way to profitability. “Frankly, in the ’80s and ’90s, many lawyers who should have remained employees were voted into ownership. They may work and be perfectly good employees, but they don’t add value as owners,” Henning says. RECORD REVENUES Leverage notwithstanding, the record profits were driven by record revenues. The average revenue per lawyer for the 20 firms was $373,500, up 3.62 percent from $361,700 in 1999. The highest RPL was $460,000 at Wilentz, Goldman, followed by $449,100 at Lowenstein Sandler of Roseland, N.J. Revenue fell at only three of the top 20 firms — Connell Foley and Newark, N.J.’s Gibbons, Del Deo, Dolan, Griffinger & Vecchione and Carpenter, Bennett & Morrissey — and all three were tiny dips. In the case of Connell Foley, the firm lost five partners at the beginning of 2000 for disparate reasons, an anomaly for the firm. At Carpenter, Bennett, where four partners bolted to an out-of-state firm, the firm was squeezed by stingy carrier rates now that more corporations are buying employment practice liability insurance. The firm usually gets higher rates from general counsel. Carpenter, Bennett commits more than a third of its partners and more than half its associates to employment and labor law. Four Gibbons, Del Deo partners also defected to a national firm, leaving the firm slightly smaller than the year before. No. 1 in revenues, as always, was Newark, N.J.’s McCarter & English, which broke the $90 million barrier and expanded into New York, Hartford, Conn., and Delaware in its effort to become a regional power. The biggest jump in revenue, 18.2 percent, was recorded by Stark & Stark of Princeton, N.J., to $25.9 million, pushing the firm to No. 16 from No. 20 the year before. The next-highest climb was at Budd Larner, which increased its gross by 15.3 percent to more than $27.1 million, moving the firm to No. 12 from No. 17. The other huge increase was registered by Drinker Biddle & Shanley, the result of the November 1999 absorption of Florham Park, N.J.’s Shanley & Fisher into Philadelphia’s Drinker Biddle & Reath, which already had a Princeton, N.J., office. Co-managing partner Daniel O’Connell estimates that the climb in New Jersey-generated revenues was about 15 percent, though exact figures were not available because of uncertainty over 1999 revenues, which could only be estimated on a restated basis after the acquisition. The results demonstrate two things. First, that regionalization is working for the old Shanley & Fisher partners as the synergies of hooking up with a larger multistate corporate and transactional firm paid off in the first year. Second, it’s not just the top eight firms that can flouish, in spite of the well-documented difficulties that mid-sized yet full-service firms have in competing with the giants, in New Jersey and out-of-state. O’Connell, who runs Drinker Biddle’s Florham Park, N.J., operation, partly credits the muscle of the combined firm. “Previously we lacked the depth and bench strength for a national class action, but now we combine a Tom Campion and a Susan Sharko with Drinker Biddle’s guys and we can get clients to give us those cases.” Campion and Sharko are former Shanley litigators. O’Connell also points to the firm’s defense on behalf of Johnson & Johnson in the federal class action over the product Propulsid, “In the past, we would be local counsel, but now we’re lead counsel and we’re utilizing 20 to 30 lawyers, including five to six partners.” Similarly, O’Connell says real estate partner Gerald Hull can take five or six simultaneous engagements because he’s getting help from the firm’s office in Berwyn, Pa. At the same time, the bankruptcy partners are getting more creditors’ committee work because of the firm’s larger in-state presence now. And that same synergy works on behalf of the rainmakers at Drinker Biddle’s Princeton, N.J., office. Jonathan Epstein, co-managing partner in charge in Princeton, cites as an example the firm’s capturing of the national real estate work of Lucent Technologies spin-off Avaya. Real estate partner Richard Goldman “could go to them and show that we have the staffing in New Jersey to handle it,” says Epstein. “Frankly, before the merger, we did not have the capabilties to do the national work.” He says the premise of the deal is working out: that the Florham Park and Princeton offices would be able to expand relationships with existing clients. But he warns that not every merger or acquisition will work out. The other out-of-state firm with a large presence in New Jersey due to a major merger, Philadelphia’s Fox, Rothschild, O’Brien & Frankel, did not fare as well. But that was partly the result of the departure of five partners from the acquired Atlantic City firm of Horn, Goldberg, Gorny, Plackter, Weiss & Perskie, as Fox, Rothschild continues to shed practices that do not fit. Phillip Griffin, Fox, Rothschild’s managing partner for New Jersey’s three offices, says that firm-wide gross was up by 20 percent and that the firm continues to bring in more laterals in New Jersey. The firm’s New Jersey revenues grew slightly, but still dropped in the survey to No. 20 from No. 14. Budd Larner is perhaps the best example of how the state’s second-tier firms can compete by concentrating on niches. In Budd Larner’s case, that includes a patent group — five lawyers and a nonlawyer chemist who represent generic drug makers or the larger pharmaceutical giants in the specialized field of litigation involving new drug application. The group is retained when a generic drug maker challenges a patent before the Federal Drug Administration. The firm also represents one of the world’s largest gun manufacturers, as well as gun distributors, under attack in class actions. Managing partner Frazza cites other niches — family law, property insurance and commercial litigation business. And just as the mid-sized firms try to stay focused on niches as they look over their shoulders at the top eight firms, the largest firms sharpen their services in an effort to fight off the onslaught of regional and national firms. Steven Gross, managing partner with Newark’s Sills Cummis Radin Tischman Epstein & Gross, says the job of his firm, and those similarly situated, is “protecting our New Jersey clients from the incursion of out-of-state firms.” He notes the obvious — the large law firms must focus on corporate giants in New Jersey and on high-end services that command higher hourly rates. This includes mergers and acquisitions, securities work and corporate restructurings. Gross points to a new corporate immigration group picked up by Sills Cummis that specializes in helping clients bring sophisticated talent, such as biotechnicians for pharmaceutical companies, into the United States. He also says intellectual property remains hot, especially with clients whose assets have real value, such as software manufacturers. Law firms must capitalize on the convergence of the high-tech economy with the brick and mortar economy now that the dot.com bubble has burst. Because the largest firms must pay so much more in salaries to get and retain the talent to provide such complex and sophisticated work, Gross says, they must continue doing more high-end work to increase the rates and the margin. Not surprisingly, with the boost in leverage and the ongoing scramble for laterals in such areas as intellectual property and securities work, the average margin at the top 20 firms dropped, from 36.43 in 1999 to 34.90 last year. That is the lowest average margin since 1992, when firms were beginning to dig out of the last recession. Nevertheless, the formula worked well at translating revenues to the bottom line. The profits per partner at the top firms, $396,500, were far below the $801,350 posted by the nation’s largest firms in the AmLaw 100 survey. But the New Jersey firms’ 7.7 percent rate of growth for average partner profit was higher than the 6.14 percent for the country’s 100 largest firms. Moreover, while New Jersey’s firms accomplished their profit hike on a 9.5 percent revenue increase, the AmLaw 100 firms were fueled by a whopping 17 percent spike in revenues. The AmLaw Profitability Index, which measures how well revenues are converted to profits by dividing revenues per lawyer into profits per partner, reached 1.06 for the Top 20, the highest in a decade. CAN IT CONTINUE? The only question now is whether the current slowdown will affect firms in the second half of 2001. Just last week, the Federal Reserve Board lowered interest rates for the sixth time this year, though only by 25 basis points, suggesting it believes the worst may be over. Most managing partners and consultants say they believe the state’s big firms will be fine, in part because of the heavy concentration on litigation, which is much less cyclical than corporate/transactional work. Stewart Michaels, who heads the West Orange, N.J., attorney search firm Topaz, says one reason larger firms continue to thrive as corporate clients struggle is because companies are downsizing all departments, including law departments, and must outsource more legal work. Michaels also agrees with Sills Cummis managing partner Gross that New Jersey firms are increasingly realizing that, like their national counterparts, they must charge different rates depending on the sophistication of the work. Law firm consultant Hellstern says he thinks firms won’t be able to replicate the corporate work of 2000 throughout 2001. “But the level of work may well just return to where it was in 1998 and 1999.” Still, he and others agree that 2000, in which a record 11 firms topped $400,000 in partner profits and in which 13 firms grew larger in size than ever before, was indeed a high-water mark.

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