Think of it as a law firm leader’s form of magic: Change the size of the equity partnership, the theory goes, and firms can manufacture changes in their reported profitability. In the simplest terms, it’s just math: Profits per partner (PPP), arguably the most watched (and critiqued) measure of a firm’s financial performance, is calculated using the number of equity partners as the denominator. Reduce that denominator, and the PPP swells.

Of course, it’s not that simple. Slashing a firm’s equity partner roster could boost the bottom line, if the partners who are cut are expensive and unproductive or in unprofitable practice areas. But cut the wrong partners, and you’ll create a drag on PPP, if the remaining lawyers generate lower billings and profits. Likewise, increasing the size of the equity partnership won’t necessarily hurt profitability: A well-chosen group of laterals might provide entrée into a new and lucrative practice area that could even increase PPP.

No doubt there are some firms that practice black magic, cutting equity partners just for short-term financial gain. Those kinds of arbitrary cuts can dampen growth prospects and lead to low morale and defections among the partnership. But when a cutback to the size of an equity partnership is done correctly, it’s a solid management technique, not financial chicanery.

“It’s certainly every law firm’s right, and a valid management tool, to try to rightsize your ownership class, and for strong firms, this tool can turbocharge results,” says consultant Ann Lee Gibson, a former chief marketing officer at Gibson, Dunn & Crutcher. “The trouble arises when struggling firms appear to be using it as an arithmetic tool to [artificially] prop up PPP.”

Given that, we wanted to know how firms had used this tool over the past decade. How much had firms changed the size of their equity ranks over that time period? And more to the point, how did those changes affect profitability? To do that, we looked at results from the 97 Am Law 100 firms for fiscal year 2012 that were also included in the Am Law 200 survey for fiscal year 2002. For each firm, we calculated growth in PPP over the 10 years, and to assess the proportionate size of each firm’s equity partnership, we divided total equity partners by total lawyers (this is different from the leverage statistic that is published with the Am Law 100 results).

Our analysis showed a clear decline in the percentage of equity owners at Am Law 100 firms. In 2002 the average proportion of equity partners at the 97 firms was 27.8 percent. By 2012 that proportion had dropped to 23.7 percent, a 4.1 percent decline. In 2002 the proportion of equity ownership ranged from a low of 12.9 percent of total lawyers at Bingham McCutchen to a high of 51.3 percent at Faegre & Benson (now Faegre Baker Daniels). In 2012 the percentage had declined on both extremes: The high was 42.2 percent at Dorsey & Whitney; the low was 10.5 percent at Squire Sanders. And a sizable segment of the firms cut their equity ranks dramatically. Nineteen firms reduced their proportion of equity partners by more than 10 percent during that time period.

Not every firm made cuts. Twenty-six increased their proportion of equity partners, and six—Bingham McCutchen, Jones Day, Morgan, Lewis & Bockius, Pepper Hamilton, Pillsbury Winthrop Shaw Pittman, and Shook, Hardy & Bacon—did so by more than 5 percent. Most of the firms that made increases, even small ones, began the 10-year period with a relatively small proportion of equity partners. For instance, Kirkland & Ellis; Skadden, Arps, Slate, Meagher & Flom; and Milbank, Tweed, Hadley & McCloy each increased their percentage of equity partners by 2.5–3 percentage points, but equity partners represented just 19–21 percent of those firms initially. Together, the 26 firms that enlarged their equity ranks had partners representing 24 percent of their lawyers, compared to 29 percent for the rest.

To see how these changes to equity ownership affected profitability, we plotted each firm’s change in equity ownership against its 10-year change in profits per partner [see "A 10-Year View"]. Our chart shows that reducing the size of an equity class can be an effective, if unpredictable, means to boosting profitability. The correlation is far from perfect, but in general, the more that a firm cut its partner class, the more likely it was to increase its PPP by an above-average percentage. (In statistical parlance, the correlation coefficient is 0.22; a perfect correlation would be 1.) The 43 firms that cut the most—and thus landed in the left two quadrants—had an average increase in PPP of 100.7 percent, compared to an average PPP increase of 74.5 percent for the rest.

Some firms that cut their partner ranks significantly still lagged behind their peers in PPP growth. Edwards Wildman Palmer, for instance, cut its percentage of equity partners from 31 percent in 2002 to 12.1 percent in 2012, but PPP increased only 37 percent, to $685,000. Similarly, Squire Sanders cut its equity partner proportion by almost 16 percentage points, to 10.5 percent, but the firm’s PPP increased only 65 percent, to $800,000.

Even for firms that have done well by cutting their partnership, there can be a stigma. Privately, some law firm leaders and senior partners admit the necessity of regular and disciplined cuts to the ownership ranks, if only to maintain PPP at a level needed to attract and retain top talent. But publicly, even firms that have reported great financial success in conjunction with equity cuts are loath to acknowledge those cuts as a conscious management strategy.

Take Jenner & Block, for instance: In 2012, equity partners at the Chicago-based firm were 25.5 percent of head count, down from 40.9 percent in 2002. Concurrently, Jenner saw an almost 155 percent increase in PPP over the 10 years, the third-highest increase in The Am Law 100. And since the average equity proportion of firms with PPP of more than $2 million, like Jenner, is just 21 percent, it seems likely that Jenner’s changes to its equity proportion were the intentional result of disciplined management.

But the firm downplays the significance of culling its equity partnership. Managing partner Susan Levy told The Am Law Daily in January 2012 that equity partner declines of 11 and 7 percent in 2010 and 2011 were “nothing out of the ordinary.” And in an emailed statement for this article, Levy pointed only to the firm’s switch to a two-tier partnership 10 years ago and its “long and venerable history” of partners leaving for public service jobs or to go in-house.

“I personally think it can be a smart and effective strategy to cut underperforming partners, and those changes can make a firm more attractive to top talent,” says consultant Kent Zimmermann of the Zeughauser Group. “But because of the inference that partner cuts means that a firm is in trouble, many people just don’t want to go there.”

Firms also want to stress their collegiality and inclusiveness, for recruiting purposes. “In order to recruit the best and the brightest, law firms still put out this pastoral picture of law firm life that hasn’t been the reality for decades,” says consultant Joel Henning.

Even firms that do not dramatically cut back their equity partnership and instead simply maintain a small one are sometimes reticent about discussing it. Quinn Emanuel Urquhart & Sullivan began our time period with a small proportion of equity partners (21.9 percent in 2002), and the firm has kept a small proportion of equity partners today (17.4 percent in 2012), a discipline that certainly helped drive the firm’s PPP growth. But the firm denies any conscious strategy to keep the equity partnership class small. “Maybe without knowing it, we’ve exercised greater discipline in electing partners and hiring laterals,” says partner A. William Urquhart. Any discussion about the economics of making too many partners is always “chatter in the background,” he says.

Some firms have bucked the management trend toward a smaller ownership class, and the minority of law firms that have significantly expanded their equity partner ranks have had mixed results. Morgan Lewis is the most notable success. The firm increased its proportion of equity partners from 20 to 27 percent while boosting its PPP by 115.3 percent. In an emailed statement, chairman Francis Milone attributed the expansion to a belief in the firm’s “talent pipeline” and a willingness to bring on talented laterals.

But other firms have sacrificed profitability when adding to their equity ranks. Pillsbury, for instance, increased its proportion of equity partners from 20.3 percent in 2002 to 26.8 percent in 2012; its PPP grew only 54.9 percent. Similarly, Shook increased its proportion of equity partners from 17.1 percent to 27.4 percent, but the firm increased its PPP by just 60.7 percent.

Shook chair John Murphy says the firm made a conscious decision years ago not to cull its equity ranks to increase profitability. “We decided that we were not going to use our equity ranks as a tool to manipulate other numbers, and if someone deserved to become equity partner, based on our criteria, then they were going to become equity partner, and PPP would be what it was,” he says. But Murphy admits that the firm’s Kansas City, Missouri, base makes it easier to attract and retain talent with a lower profits per partner figure.

The number of firms significantly expanding their equity partner shares is likely to remain small, especially in the current low-growth market for legal services. In The American Lawyer‘s most recent Law Firm Leaders Survey [December 2012], 46 percent of respondents said they plan to deequitize partners in 2013, an 8 percent increase from the year-previous survey. “Many firms are today looking at equity partner ranks as almost a zero-sum game, and if you’re looking at the net income pie as being flat or growing more slowly, then the number of the slices of pie really matters,” says Dan DiPietro, chairman of the Law Firm Group at Citi Private Bank.

“It seems pretty inexorable,” says one partner at a firm that has significantly reduced its proportion of equity partners. “We’ve joked that pretty soon we’ll end up with just two equity partners fighting it out in a steel cage.” But even then, the question still would be: Would those two partners be richer together, or apart?