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The December collections frenzy is now a memory. If the check was really in the mail, it’s arrived and been counted. Firms have paid last year’s bills, written their year-end bonus checks (if so inclined), and divvied up the profits. Thankfully, the books are closed on 2001. Yes, it was a bad year. The American Lawyercanvassed law firms across the country, and we have an early read on just how bad it was. But there was a bright spot: Firms showed surprising agility in dealing with the recession. The prevailing management mantra seems to be: Remember the early 1990s. At that time, many firms were caught off guard by a recession and, in a panic, fired associates en masse. When the market picked up again, firms were too shorthanded to capitalize fully. This time around, most firms are navigating the downturn by easing up on the gas, not slamming on the brakes. “During the last recession, we overreacted [in cutting the rate of hiring of corporate associates by almost 50 percent],” says Harry Reasoner, a senior partner at Houston’s Vinson & Elkins, which posted an 18 percent increase in revenue and a 14 percent rise in profit in 2001. “This time, we didn’t want to cut hiring or do anything else so that we wouldn’t be prepared to take advantage of coming out of this recession.” Of course, the legal industry typically lags behind corporate America, so firms may not yet have felt the full brunt of the recession. If it proves especially lengthy, the resolve of large law firms will receive a much stiffer test. But first, the grim numbers. As expected, many firms were knocked off their perches in 2001; the fall was the steepest for firms that specialize in representing technology clients and emerging growth companies. In the San Francisco Bay Area, for example, Brobeck, Phleger & Harrison; Wilson Sonsini Goodrich & Rosati; and Cooley Godward saw their profits per equity partner drop 44, 11 and 21 percent, respectively [see "How Bleak Was the Valley?"]. It was a dramatic reversal for these firms, which had stellar years in 2000, when Brobeck’s gain in per-partner profits was 37 percent, Wilson’s gain was 12 percent, and Cooley’s was 36 percent. Beyond the tech sector, firms with big corporate practices were also battered by the bear market, especially firms that rely heavily on work in initial public offerings, mergers and acquisitions, and private equity. In New York, some elite corporate firms did well just to post slight earnings growth from 2000 levels. Fried, Frank, Harris, Shriver & Jacobson; Shearman & Sterling; and Simpson Thacher & Bartlett, for example, increased their earnings last year by no more than 5 percent. In 2000, meanwhile, most of the top corporate firms had at least 10 percent revenue growth. (Fried Frank; Shearman; and Simpson were up 22, 20 and 15 percent, respectively.) In fact, only one firm in the top 50 of The Am Law 100 had less than 5 percent earnings growth in 2000 — New York’s Willkie Farr & Gallagher, which had a 4.6 percent increase in revenue. (Thanks to litigation and bankruptcy work, that firm’s revenue increased by more than 10 percent in 2001, according to chairman Jack Nusbaum.) Some large firms, especially those outside New York and Silicon Valley, posted decent revenue growth last year. They had more lawyers generating fees, and they enjoyed upticks in bankruptcy and litigation work. In late December, for example, lawyers at Miami’s Greenberg Traurig, Philadelphia’s Dechert, and Dallas’ Akin, Gump, Strauss, Hauer & Feld projected that their 2001 revenues would show a 20 percent increase over 2000 levels, thanks in part to their taking on more lawyers during 2001. “The corporate side of the firm was slower last year,” says Akin Gump chair R. Bruce McLean. But the firm’s litigation and bankruptcy practices, he says, posted 15 percent increases in billables. Still, many of the firms that achieved impressive revenue growth in 2001 — such as Greenberg — did little more than keep pace with their growth in head count. Associate attrition was down substantially, so firms had more fee-earners last year (and hence more revenue) — but more mouths to feed as well. “A lot of firms will say that they had their best revenues year ever [in 2001],” says William Lee, the managing partner of Boston’s Hale and Dorr. “But everyone expanded a lot in 2000.” At the end of last year, Lee was projecting that his firm’s revenue for fiscal year 2001 would be up but that its average revenue per lawyer would drop. Indeed, the best measure of a firm’s success last year was whether it generated higher revenue per lawyer, on average, than in 2000. Many firms failed the test because they had too many lawyers — especially corporate lawyers — sitting on their hands for too long. And firms didn’t score nearly enough premium fees to make up for this drop in demand. There are only two ways to increase revenue per lawyer: more hours or higher billing rates. In the short run, neither seems very promising. Busy lawyers have little in the way of extra time to give. “There is no more elasticity there,” as Peter Pantaleo, CEO of Washington’s Verner, Liipfert, Bernhard, McPherson and Hand recently told Legal Times, the American Lawyer Media weekly newspaper in Washington, D.C. Lawyers with time on their hands may be able to retool, but that’s hardly a formula for increasing their personal revenue. Higher billing rates may be a nonstarter, too [see "So What Now?"]. Even the firms that jack up their fees don’t expect to collect on them fully. And some clients don’t want to heed pleas from their outside service providers. “I’ve sent a letter to most of our firms telling them that I don’t want a rate increase in 2002,” says William Lytton, general counsel of Stamford, Conn.-based International Paper Company. “We will take aggressive action, including bidding out more business, and we expect firms to come up with ideas to help us provide high-quality legal services at reduced costs.” Law firm managing partners concede the point. “It will be much more difficult to raise rates next year, especially in practice areas that are down,” says Greenberg managing partner Cesar Alvarez. “During boom times, corporate attorneys could get high rates, but bankruptcy attorneys couldn’t. Now the situation is reversed.” Per-partner profits also dwindled in 2001. With productivity lagging and expenses soaring, thanks to rising associate head counts, it was a tough year to generate profits. Most firms didn’t increase associate salaries at the beginning of the year, and they cut or greatly reduced year-end bonuses. This helped to prop up average profits per equity partner last year, but many firms still didn’t keep pace with fiscal year 2000, when average growth in profits per equity partner among Am Law 100 firms was 6 percent. In late December, for example, some firms, such as Hale and Dorr; Simpson Thacher; Chicago’s Kirkland & Ellis and Baker & McKenzie; and Tampa’s Holland & Knight, were projecting that their profits per equity partner would be flat or decline in 2001. In short, it was the sort of year in which firms might be expected to take drastic measures, such as firing associates. Some did. In November, Shearman & Sterling — with average profits per equity partner of $1.35 million in 2000, the 11th-highest of Am Law 100 firms — laid off at least 90 associates, attributing the dismissals to the economy, and some expected other top-tier firms to follow suit. But so far, the bloodletting has been largely limited to technology-focused firms. In the early ’90s, in contrast, Shearman had plenty of elite company when it laid off associates, including New York’s Skadden, Arps, Slate, Meagher & Flom; Cahill Gordon & Reindel; and Fried, Frank; as well as four other firms that were then in the top 20 in The Am Law 100′s profits-per-equity-partner rankings. (Of course, scores of firms are aggressively thinning their associate ranks these days through stricter performance reviews.) In part, firms have been better able to weather this downturn because this recession has not been as deep as the nine-month recession of the early ’90s. But firms are also operating more like businesses (finally!). Over the past decade they increased capitalization by withholding more partner income; outsourced back-office functions such as postal and copying work; and reduced the number of staffers per lawyer. “Even during the boom times [of the late '90s,] firms focused more on leverage and improving realization,” says consultant William Johnston, a director at Hildebrandt International. “Firms are stronger now.” Firms also did a better job of anticipating this recession. In 2000, Boston’s Bingham Dana, for example, saw the warning clouds. So, at the beginning of 2001, when some of its competitors in Boston upped their starting associate pay to $135,000, it stayed out of the fray. Throughout the year, it also held off on staff expansion and curtailed lateral associate hires. Like every firm, Bingham was rocked by 2001′s decline in corporate work — its average profits per equity partner will be up, at best, only slightly in 2001 — but it hasn’t laid off associates. “We spotted this early on, and that has been tremendously helpful,” says Jay Zimmerman, the firm’s managing partner. Adds Danilo DiPietro, head of the Law Firm Group at The Citigroup Private Bank: “Firms started right-sizing in 2000 by watching their expenses and easing up on tech and real estate costs, so on the whole, firms have had to resort to less draconian measures last year [than in the early '90s].” Thus far, many of the trims have come easily — “a $20,000 item here, a $50,000 item there,” as one firm head put it. Last year, for example, Dechert asked its lawyers to fly economy-plus instead of club class on international flights. New York’s Davis Polk & Wardwell watched its use of staff more closely to cut back on overtime pay. Houston’s Fulbright & Jaworski scaled back slightly on holiday parties and recruiting events. Akin Gump substituted videoconferencing for some travel between offices. It hasn’t all been a lark: At many firms, fewer partners were made, and more were eased out. “These kind of times,” says Holland & Knight managing partner Robert Fagen, “make you focus harder on what are the criteria for someone coming into the position of partner and make you look harder at what it takes to stay in that position.” Firms such as Washington, D.C.’s Shaw Pittman made smaller partner classes than in previous years. Others, such as Holland & Knight and Richmond, Va.’s Hunton & Williams, revisited whether their partners’ equity shares were in line with their productivity. Elsewhere, reports Citibank’s DiPietro, firms approached their most senior partners to inquire politely whether it was time to retire. Now for the really grim news: The recession is not over. The first quarter started poorly. The problem is not that lawyers are having trouble collecting on their end-of-the-year work, it’s that there aren’t enough bills coming due. Many firms coasted through the first half of 2001 on work and billings from 2000. That’s not possible this year. Making matters worse, most big firms have not rolled back the wage or hiring increases of the last few years. Associate attrition has slowed. Those who have stayed on are due for raises. Therefore, overhead will keep mounting. If the work doesn’t reappear soon, more associates may disappear. And unless firms can find clients willing to take healthy rate increases, partners may face cuts in their monthly draws. There is a becoming modesty afloat. Firms have budgeted for only small increases in earnings and profits for 2002. At this point, firm leaders remain resolute in their determination not to panic. And if Dechert’s lawyers can fly club class again this year, there may even be cause for jubilation.

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