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To steal an image from prime-time television’s “Survivor,” despite the economic tumult of 2001, none of the Daily Report Dozen firms were voted off the island of prosperity. Granted, some came close. In a year of unexpected national tragedy, there was also a recession, fiscal uncertainty and stock market volatility. It was a year in which Arnall Golden & Gregory, among the last of Atlanta’s true midsize firms, saw revenue and net income drop by about 4 percent. It was a year in which Ogletree, Deakins, Nash, Smoak & Stewart’s partners took, on average, a pay cut of more than $26,600. For some Daily Report Dozen firms, it was a year of layoffs and cost-cutting. Despite all that, average revenues among the Dozen rose 20.5 percent. To be sure, the big revenue boosts of Troutman Sanders’ merger with Mays & Valentine (77.7 percent), and Alston & Bird’s union with Walter, Conston, Alexander & Green (26.5 percent), skewed that number. But taking out those gains, revenue still rose between 13 and 14 percent. In fact, the percent increase in revenue at seven of the top 12 firms was actually higher in 2001 than in 2000. And who said there was a recession going on? RECESSION? WHAT RECESSION? Atlanta’s revenue growth was “pretty darn good,” said Thomas S. Clay, managing director of legal consulting firm Altman Weil Inc. in Newtown Square, Pa. He attributed the growth to a relatively robust Southern economy and booming countercyclical practices such as bankruptcy and litigation. There were other factors at work, too. Most of the Daily Report Dozen firms were slow to jump on the technology and dot-com bandwagons. They missed some of the financial highs, but they may have missed some of the lows, too. Also, simply because of geography, Atlanta firms were less affected by the tragedies and business interruptions of Sept. 11 than their counterparts in New York and Washington. Atlanta firms’ financial health was more the norm than the anomaly, according to Clay. “There was no part of the country that was horribly hit,” he said. “I think the data are going to surprise people a little bit. Although last year was flat … I would say well over half the firms I deal with say, ‘We had a banner year last year.’ “ Nationwide, according to the Am Law 100 ranking of the nation’s top firms, published by Daily Report sister publication The American Lawyer magazine, revenue rose 13 percent. But a few firms in other states did get voted off the island. Fenwick & West, based in Palo Alto, Calif.; Minneapolis-based Robins, Kaplan, Miller & Ciresi; and New York’s Kelley Drye & Warren are among those that fell off the Am Law 100 because of poor revenue performance. As for net income — the pot of gold that equity partners divide — Atlanta firms grew an average of 15 percent. That’s about five percentage points higher than the 2000 average. Compare that with the net income at a few of Atlanta’s top corporations — all of which are represented by more than one Daily Report Dozen firm. Delta Air Lines’ profit margin fell a stomach-churning 246.9 percent; Coca-Cola Enterprises Inc. plummeted 236 percent. BellSouth was down 39.1 percent; Southern Co. fell nearly 14.7 percent. Oh, yeah. That recession. WHO GOT PINCHED, WHO DIDN’T That recession did have some impact on law firm partners’ profits. On average in 2001, profits at Atlanta’s top 12 firms went up by $21,059; between 1999 and 2000, they rose more than $37,000. If your raise wasn’t that high, don’t rush to the managing partner to whine about it just yet. That $21,059 number is a little misleading, because at five Daily Report Dozen firms, profits inched up in the $1,000 to $2,000 range or took a five-figure fall. Though several partners interviewed for this package of stories lamented scanty pay increases, Altman Weil’s Clay said some leveling off of pay in this economy is normal — though some partners’ expectations aren’t. “Some of these guys really do think it’s a never-ending, double-digit increase in earnings, and it’s absolutely irrational,” he said. “They sort of assume that there’s only one direction in life and that’s up, in terms of earnings. … And they often get to expect double-digit increases, and even when there’s a flattening, a normal flattening … there’s a very strange reaction. ‘The firm’s in trouble!’ … It’s pretty naive.” A closer look at the numbers shows three notable outliers pushing up the average: Long Aldridge & Norman (which merged to become McKenna Long & Aldridge on June 1), Kilpatrick Stockton and King & Spalding. But none of those firms had impressively high increases in revenue per lawyer. What gives? At Long Aldridge, despite revenue per lawyer growth of just more than $1,600, the firm managed a profit per partner increase more than $58,200 by cutting expenses and leaving leverage exactly the same at 3.45. The other two firms, however, have higher leverage to thank for their higher profits. At King & Spalding, for example, revenue per lawyer rose only $14,298 — giving it an unimpressive eighth place in that growth category. But equity partners’ profits rose $73,507 — the highest increase in the rankings. Here’s how it happened. The firm’s leverage changed from 3.89 to 4.25. That’s roughly the equivalent of an additional one-third of a lawyer for each partner. If leverage had stayed the same as in 2000 — this means an additional 14 equity partners — theoretically, their profits would have dropped by about $1,550. Kilpatrick Stockton’s situation was similar. Revenue per lawyer rose $26,502, but profit per equity partner rose $57,828. Leverage grew from 3.35 to 3.87 — the equivalent of an additional one-half lawyer per equity partner. If leverage had stayed at 2000 rates — an additional 20 equity partners — their pay could have fallen $3,172. TECH TRAP Remember, profits fell at only two of the Daily Report Dozen firms. Arnall Golden’s slipped 2.5 percent; Ogletree Deakins’ fell 8.4 percent. That’s mild compared to what the Am Law 100 will report about some other firms: for example, at San Francisco-based Brobeck, Phleger & Harrison, partners’ profits plunged 43.9 percent. “As it turned out,” said Charles J. Santangelo, a director at legal consulting firm Hildebrandt International’s Naples, Fla., office, “the firms that really got hammered were what I’ll call Silicon Valley-type practices. No matter the firms, no matter the geographic area, they took the brunt.” Also, he said, firms that focused on initial public offerings, mergers and acquisitions and high-level financing felt the pinch as well. BELATED DRY SPELL Atlanta corporate practices were not immune, but thanks to work in the pipeline, even corporate lawyers didn’t have to spend too much time reading the paper or searching for new hobbies in 2001. This year, however, it’s a different scene. Ten corporate lawyers interviewed for this story expressed concern that the pipeline was drying up. Arnall Golden corporate partner Jonathan Golden said that though his firm’s corporate group handled some big deals — including serving as tax counsel to Rodamco North America, which Urban Realty bought for $2.5 billion — they definitely felt the economy’s slide. “Our corporate practice last year was very healthy because we had a lot of these big deals floating around for a long period of time,” he said. “What my sense is, the pipeline’s just been sucked dry.” Robert W. Grout, the section chief of Troutman Sanders’ corporate group, had no trouble listing deals that lawyers at his firm have closed in the last 18 months or so. But he referred to those transactions as “the kinds of deals we wish we still had.” A glance at a few of them shows why. The firm served as counsel to Securicor PLC — the largest airline security company in Europe — in its fateful, pre-Sept. 11 purchase of Atlanta-based Argenbright Security for $185 million. In another transaction, this one closing in March 2002, the firm helped American Trans Air with a $257 million leveraged lease transaction for five new Boeing aircraft. For the firm’s once-busy aircraft finance practice, that deal may be among the last of its kind for awhile. Troutman’s corporate group kept busy through 2001 because corporate deals have a long lead time, Grout said. Lawyers didn’t feel the slap of a poor economy till months after it began to fail; likewise, he said, they’re unlikely to feel a recovery until four to six months after it has happened. At this point, it’s impossible to predict how either the economy or law firm finances will look at the close of 2002. Altman Weil’s Clay advised firms — regardless of what happens — to pay attention to the business side. This means good financial management at all levels, raising billing rates, and looking hard at growth opportunities rather than just picking up any law firm hungry for a merger. “As Peter Drucker said, dealmaking is sexy, but managing is dirty, grubby work,” Clay advised, paraphrasing the management guru. “But that’s where you make the money.” Related charts: Daily Report Dozen Scorecard Compensation for All Partners Revenue per Lawyer Profit per Equity Partner Change in Profit per Equity Partner Revenue Growth

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