By the numbers, Joseph Tate may be the luckiest lateral of the past 25 years. When Tate moved to Dechert from Schnader Harrison Segal & Lewis in 1991, he was moving from one top-five Philadelphia firm to another. As it turned out, he was also moving from the firm that dropped the most ranks by size in the past quarter-century to the one that gained the most ranks in profits per partner, among firms on the original Am Law 100 list (for fiscal 1986).
Since 1986, Schnader has been overtaken by 173 law firms, as it fell to 246th by attorney head count, placing it at the cusp of falling off The National Law Journal ‘s NLJ 250. Meanwhile, Dechert leapfrogged 52 firms, as it grew its profits per partner (PPP) nearly tenfold, from $220,000 in 1986 to $2.11 million in 2011. “I would never have imagined the growth that we’ve had,” Tate says.
Most veterans of The Am Law 100 could say the same. In the quarter-century since The American Lawyer began tracking the nation’s 100 largest law firms, total gross revenue for that cohort has multiplied more than tenfold, from $7 billion to $71 billion. In nominal terms the average Am Law 100 PPP has more than quadrupled, from $324,500 to about $1.4 million. Providing fodder to those who see a widening class divide, the average Am Law 100 partner earned 11.3 times the average American employee’s compensation in 1986, and 23.4 times that benchmark in 2010, the last year for which data is available.
Much has changed in the surrounding culture since The Am Law 100 was introduced, but when our story begins, the basic dynamics of the law firm business were already in place. In 1986 (our financial base year), L.A. Law went on the air, and Cravath, Swaine & Moore raised starting salaries from $53,000 to $65,000. In 1987 (when the Am Law 100 survey was first published), Scott Turow wrote Presumed Innocent, and Baker & McKenzie was nearing the 1,000-lawyer mark. The top firms were big and rich, and rapidly getting bigger and richer.
The story of The Am Law 100′s transformation is, in significant part, the story of Joseph Tate multiplied thousands of times [see "A Tale of Two Partners"]. Whether they moved solo, or as part of a megamerger, laterals were usually the molecular units of change at the firms that changed fastest. We cannot assess here the strategies that attracted or repelled star lawyers—or any of the myriad management actions and omissions that can alter a firm’s trajectory. What will be assessed are the long-term results. A quarter-century of profit and revenue competition has reordered the law firm landscape, one lateral move at a time. Which firms, and groups of firms, rose or fell most dramatically in the standings? With the benefit of hindsight, who looks long-run lucky and who looks long-run foolish?
By 1986, the choreography of the lateral dance was fully worked out. The National Law Journal counted 145 head-hunting agencies, and about a dozen ran ads in the inaugural Am Law 100. It should therefore come as little surprise that in September 1987—in the very next issue after The Am Law 100 was launched— The American Lawyer ‘s cover read: “Bye, Bye, Finley, Kumble: The firm everyone loves to hate is falling apart.”
The comically top-heavy Finley, Kumble, Wagner, Heine, Underberg, Manley, Myers & Casey placed second in the first Am Law 100′s gross revenue rankings before collapsing (as predicted) the next year, in a bankruptcy so messy it lasted a decade and a half. Its fall contained unique elements—Finley goosed its profits with brazen internal loans—but in key respects the story would repeat itself several times. Finley lived by the lateral and died by the lateral. Like Brobeck, Phleger & Harrison, which in 2003 eclipsed Finley’s record for the largest law firm bankruptcy, Finley expanded its head count by 40 percent in a single year in the run-up to its demise.
Finley and Brobeck are among ten firms on the original Am Law 100 that died. Another eight disappeared through merger with a larger firm. Thirteen surviving firms missed the revenue cutoff for the latest Am Law 100. That leaves 69 firm veterans of the first Am Law 100 on the current list in recognizable form.
“That’s a pretty stable list,” says Ward Bower of the Altman Weil consultancy, whose face may be found beaming from an ad in the first Am Law 100. Certainly, Bower is right relative to the top 100 of the Fortune 500, where only 30 companies weathered the last quarter-century in recognizable form. He’s especially right about the top of the original Am Law 100 list: Finley is the only top-40 firm to go belly up. And Bower’s also right if you focus on the top 20 by PPP—that group remains 75 percent the same. All the usual suspects are there, with a bit of reshuffling, and Wachtell, Lipton, Rosen & Katz is still firmly ensconced at the top.
But another seasoned consultant, Peter Zeughauser of the Zeughauser Group, had the opposite reaction when shown a 25-year study of The Am Law 100. “It shows that this is a more dynamic market than people realize,” says Zeughauser. And he’s right too.
Eleven of the top 20 by gross revenue on the 1987 list (which was based on results for 1986) are no longer in the top 20. Most of the fresh faces near the top of this year’s list were formed through merger, like number 17 K&L Gates, which rose 69 places from predecessor Kirkpatrick Lockhart’s spot at 86 in 1987. But the biggest revenue riser in today’s top 20, Greenberg Traurig (at number ten), did it by cherry-picking laterals. Indeed, Greenberg was so small in 1986 that it missed our first Am Law 100, and it can only be tracked on The NLJ 250 (whose attorney head count is a rough proxy for gross revenue). On that list, Greenberg rose 170 notches over the quarter-century, from 179 to nine.
While Finley is the only fatality in the 1987 list’s top 40 by gross revenue, 27 of the next 60 disappeared from The Am Law 100—whether through death, shrinkage, or merger with a larger firm. Many of the rest hung on only because they swallowed other firms. It’s here, below the top of the list, that management mattered most. “Leadership is critical,” says Tate, who switched from Schnader to Dechert. Shrewd moves compound over time, and so do mistakes.
So now we know who’s up and down. But are any trends apparent in the ebb and flow of firms on our charts? We asked American Lawyer founder Steven Brill to study the rankings for the first time since he sold The American Lawyer ‘s parent company 15 years ago—like a legal market Rip van Winkle. What jumped out at him was the relative decline of New York. “I’m really intrigued by how a lot of firms outside New York have prospered,” Brill says.
Zeughauser, who never stopped paying attention to the legal market, agrees that this is the dominant story of the past 25 years. “The profit increases by non–New York firms are just enormous,” he says. “They are encroaching on the New York firms’ historic position alone at the top.”
A deep dive into the numbers confirms that the most impressive gainers are non–New Yorkers. Consider the 500-and-1,000 Club [see "How They Stack Up" from the Tracking Feverish Growth chart package]. Between 1986 and 2011, these eight firms managed at least 500 percent PPP growth and at least 1,000 percent revenue growth (usually much more). In real terms they sustained a compound annual growth rate of 11.7 percent in revenue turnover and 8 percent in earnings. And each of these firms originated outside of New York, although many of them have opened large offices in New York [see "Myth Busters"].
Boston’s Ropes & Gray, for example, jumped 42 places by revenue and 35 places by profit on the back of its private equity clientele. Other double-barreled stars are best known for litigation or technology or hedge fund work. “It shows that investment banks are no longer the only route to the top,” says Zeughauser.
Two members of the 500-and-1,000 Club are products of mergers within The Am Law 100: Bingham McCutchen (via McCutchen, Doyle, Brown & Enersen) and Sidley Austin. It’s no shock that these firms managed above-par revenue growth (although Pillsbury Winthrop Shaw Pittman, which combines four members of the original Am Law 100, shows that this is not guaranteed). What may come as a surprise is that big mergers can be consistent with stellar profit growth.
If one broadens out to the somewhat less rarefied 400-and-1,000 Club (PPP increase of at least 400 percent and gross revenue increase of at least 1,000 percent), nine additional firms qualify, and only one historically New York–headquartered firm is among them—Cleary Gottlieb Steen & Hamilton. But because it started in a high position on the charts, Cleary only clawed its way up five revenue ranks, and six profit ranks.
Perhaps the biggest surprise in the 400-and-1,000 Club is Baker & McKenzie, which barely makes the cut. Long dismissed as a franchise, Baker & McKenzie began the processes of both consolidation and globalization a generation before its peers. Its progress gives credence to the argument that if a firm gains enough market share and builds a unique client offering, higher profits will eventually follow. And its ability to build so rapidly on a 1,000-lawyer base suggests that the consolidation of the legal profession still has a long way to go.
A city-by-city study only sharpens the point that the native New York firms are losing ground. If one averages the profit and revenue growth of every Chicago firm on the first Am Law 100, or every San Francisco firm, those composite firms qualify for the 400-and-1,000 Club. The average firms from Washington, D.C., Los Angeles, and Philadelphia are close behind. In contrast, the average New York firm gained only 307 percent by PPP, and 664 percent by revenue [see "How They Stack Up" from the Tracking Feverish Growth chart package ].
However, if firms with New York roots are being displaced at the top of the profit charts, they are being displaced slowly. Having once constituted 21 of the top 25 by profit, they now constitute 16 of the top 25. Having once constituted nine of the top ten by profit, they now constitute seven of the top ten.
Strikingly, all of the interlopers in the PPP top ten are litigation powerhouses: Quinn Emanuel Urquhart & Sullivan; Kirkland & Ellis; and Irell & Manella. Quinn’s achievement is especially impressive because it was founded the year before our survey period begins. Irell offers the best example of a successful boutique strategy, having lost about as many spots in revenue as it gained in profit, and falling into the Second Hundred. Kirkland accomplished the hardest management trick, ascending both the revenue and profit peaks from a high staging ground. It compares particularly well with its 1986 peers.
New York’s slippage is faster on the gross revenue side. Nine of the ten New York firms in the original top 20 have slipped in rank. White & Case is unique in having soared in gross revenue rank even as it plummeted on the PPP charts. In effect, White & Case bought market share at the expense of profits, while Cadwalader, Wickersham & Taft sacrificed market share to boost profits. Cravath sacrificed market share to roughly maintain its profit rank. All of these strategies are risky, but defensible. The Cadwaladers and Cravaths think that size is irrelevant to elite practice. Cravath relies on organic growth to develop talent, and hews to a single-tier partnership to preserve firm culture. White & Case believes that it will be part of a super-league of global megafirms.
It’s harder to justify losing substantial ground in both gross revenue and PPP. Eleven of the native New York firms from the 1987 list fall into that category, ranging from Kelley, Drye & Warren (which has fallen to the Second Hundred) to Shearman & Sterling. The benign interpretation is that the New York firms are fine, because they started from such high heights—the declines are only relative, and the absolute numbers remain impressive. Zeughauser argues otherwise. “New York firms are the frogs in the boiling water,” he says. “They look good because they still have a big lead. But they’re not so good, because the lead is evaporating.”
Among markets with clusters of firms on the inaugural Am Law 100, only Houston underperformed New York. Indeed, all three top Houston firms declined substantially on both metrics.
Bower says forgivingly that the Houston firms are enviably positioned in the global energy market, and enjoy about as low a cost of living as any major city in the United States. Fulbright & Jaworski, in particular, has few nonequity partners compared with most of the major firms outside New York that have climbed the profit ladder over 25 years. Zeughauser (who, like Bower, has consulted in the Texas market) retorts that, regardless, the Houston firms have left themselves vulnerable to poaching by outsiders, such as Latham & Watkins, which have opened Texas offices. “Houston has been successfully invaded,” he says.
It is true that PPP gains may be the product of shrinking the equity partnership rather than raising productivity or attracting more premium work. And how you get there matters greatly, for both the stability of the partnership and the achievement of true excellence. But as Zeughauser puts it, “PPP is the coin of the realm in the lateral market.” For better or for worse, the competition for laterals creates inexorable pressure to boost earnings, lest a firm tumble into the dustbin of history or slowly slide into irrelevance.