Correction, 6/7/13, 3:50 p.m. EDT: The print version of this story included an incorrect figure for the aggregrate decline in The Am Law 200′s cost base in 2009. The correct figure is $2.4 billion. The fourth paragraph of this story has been revised to reflect the correct figure. We regret the error.
September 15, 2008: The day everything changed. In the early hours of the morning, while most of America slept, investment bank Lehman Brothers Holdings Inc. filed for Chapter 11 protection. The U.S. economy was already reeling from the collapses, one week prior, of government-sponsored mortgage buyers Fannie Mae and Freddie Mac, which collectively owned or backed the majority of the country’s $12 trillion mortgage market. Lehman’s bankruptcy, which remains the largest in U.S. history, and the subsequent bailout of insurance giant American International Group Inc. the very next day, was enough to send the financial markets into full-blown meltdown. The impact on the country’s top law firms was profound.
For The Am Law 200, the 200 largest U.S. law firms by revenue, a decade of sustained growth came to a sudden and grinding halt. After aggregate revenues more than doubled from $41 billion to over $84 billion between 2000 and 2008, $2.4 billion was wiped from the group’s collective top lines in 2009—the first fall in overall revenue since we started tracking law firm financials in 1985. In total, 118 Am Law 200 firms saw their revenue contract in 2009 (62 in The Am Law 100, 56 in the Second Hundred).
Facing increased pressure from clients on billing rates and a dramatic reduction in demand—a recent survey by Hildebrandt Consulting and Citi Private Bank finds that demand for legal services has contracted at a compound annual growth rate (CAGR) of 0.4 percent since 2008—many firms were forced to cut costs in order to prevent their profits from plummeting.
More than $2.4 billion was trimmed from The Am Law 200′s total cost base in 2009, a fall of 4.5 percent. As a result, while total revenue for the group fell by almost 3 percent that year, net income and average profits per equity partner (PPP) levels remained broadly flat.
Much of the cost savings came in the form of painful rounds of lawyer and support staff layoffs: Am Law 200 firms collectively employed almost 950 fewer lawyers in 2009 than they had over the previous 12 months.
But despite the severity of the Great Recession, The Am Law 200 actually fared remarkably well. The $2.4 billion reduction in aggregate revenue in 2009 was recouped within the space of 12 months, with total group revenue rising $3 billion in 2010 and continuing to grow at a CAGR of 4.1 percent over the past two years. Of the 186 firms that have been present in The Am Law 200 in each of the five years since the start of the recession in 2008, 134 increased their gross revenue over that time. Of those, 122 achieved increases in net income as well. Amazingly, more than half of all Am Law 200 firms posted higher figures in each of four key metrics—revenue, net income, revenue per lawyer (RPL), and PPP—in 2012 than they did before the recession hit. To get a sense of how individual firms survived the recession, we calculated five-year CAGR growth rates for revenue per lawyer and profits per partner for the 186 firms that have consistently appeared on The Am Law 200 since 2008. To see the results of those calculations in interactive chart form, go to " The Recession’s RPL Winners" and "Rich in Profits and Getting Richer."
"The law is a ‘follow the money’ profession," says Peter Zeug­hauser, founder of legal consulting firm Zeughauser Group. "As a general rule, when the economy is healthy, the legal industry is healthier, but law firms are, to some extent, less affected by downturns than many other industries."
In assessing the winners and losers across The Am Law 200 over the last five years, we looked at how firms have increased their revenue in a flat market; how mergers have reshaped the legal landscape; how West beat East in the battle of the coasts; which practice areas resisted the crunch, and which didn’t; the impact of some radical changes in leverage; and how the "new normal" is here to stay.
With the consolidation of the legal industry gathering pace—there have been 60 mergers involving Am Law 200 firms in each of the past two years, according to management consultancy Altman Weil’s MergerLine, which tracks publicly reported mergers among U.S. law firms—it is perhaps unsurprising that the majority of firms with the highest five-year CAGRs in gross revenue combined with other firms during that period. Four of the five fastest-growing firms between 2008 and 2012 (Polsinelli; DLA Piper; Hogan Lovells; and Bradley Arant Boult Cummings) and six of the top 10 (Lewis Brisbois Bisgaard & Smith; and Kilpatrick Townsend & Stockton), bolstered their revenues by mergers or acquisitions.
At the top of the list is Polsinelli, the result of a February 2009 merger between Polsinelli Shalton Flanigan Seulthaus and Shughart Thomson & Kilroy. The Kansas City, Missouri–based firm heads the rankings for growth in both revenue and net income—achieving five-year CAGRs of 24.8 percent and 23.4 percent, respectively.
But the growth is not entirely a result of the tie-up. While the deal provided an estimated $40 million boost to Polsinelli’s top line in 2009 (Shughart’s total annual revenue before the merger was around $65 million), the firm has continued to grow strongly in each of the subsequent years. And despite a 94 percent leap in total lawyer head count since 2008—the third-highest across The Am Law 200—it still managed to tie with Brown Rudnick for sixth-place for RPL growth, with a CAGR of 5.7 percent. (Polsinelli’s 2012 RPL of $480,000 is low, however—it tied with GrayRobinson and Burr & Forman to be The Am Law 200′s 17th-smallest.)
Polsinelli chairman and CEO W. Russell Welsh cites the firm’s health care practice—which spans corporate and regulatory work and now accounts for around 20 percent of Polsinelli’s total revenue, up from just 2 percent in 2005—as one of the key drivers of its growth. The firm also benefited from having the bulk of its lawyers and infrastructure based in the Midwest, which has "helped keep the costs down," Welsh adds. Polsinelli also downsized in areas that were hardest hit by the recession, such as finance, where the firm previously handled work relating to mortgage-backed securities [see "Healthy Living"].
Of the firms that didn’t merge during the recession, it is, somewhat predictably, those with heavy litigation and dispute resolution practices that generally performed the best. Paul, Weiss, Rifkind, Wharton & Garrison and Kirkland & Ellis were among a host of top litigation firms to enjoy solid growth—Kirkland’s net income CAGR of 16.2 percent and value per lawyer CAGR of 10.6 percent were each the sixth-highest across the entire Am Law 200—but their figures pale in comparison to those of business litigation powerhouse Quinn Emanuel Urquhart & Sullivan. The Los Angeles–based firm’s meteoric growth continued unabated throughout the downturn, with revenue up 93 percent, to $852.5 million, over the past five years—comfortably the largest gain of any firm not to have merged during that period. Quinn’s net income, meanwhile, has more than doubled, to $536.5 million, since 2008, adding $1.1 million to the firm’s average PPP, which now stands at a cool $4.4 million—second only to Wachtell, Lipton, Rosen & Katz, at $5 million. (Impressively, given its focus on big-ticket M&A deals, which have been in short supply during the crisis, Wachtell maintained its market-leading RPL throughout the recession, coming in at just under $2.5 million in 2012.)
"Our growth is astounding, even to me," says Quinn Emanuel name partner William Urquhart. "We’ve now had double-digit grown in revenue and profit for each of the past 20 years, apart from 2009, when we scaled back, as we didn’t know what was going to happen during the recession. Whereas what we should have done is double our hiring, which we’ve done every year since. We’re not numb to the idea that at some point we’re going to saturate the market, and that our ability to win new work and clients has to reach some limit, but that’s why we’ve branched out into new areas like [International Trade Commission work] and international arbitration."
Urquhart says the firm has "benefited immensely" from its strategic decision not to represent global financial institutions, making it one of the few firms able or willing to take cases suing the banks, and its decision 20 years ago to build a practice in IP litigation. "That started paying dividends a decade ago, but the dividends it pays now are enormous," he adds.
Specializing in IP litigation also paid dividends for another Los Angeles outfit, Irell & Manella. The firm, which represented TiVo Inc. in patent infringement lawsuits with AT&T Inc. and Microsoft Corporation, tops our five-year RPL chart with a CAGR of 7.5 percent. (Irell’s 2012 RPL of $1.56 million was beaten only by Wachtell.) Irell also ranks in the top three for PPP growth, with the firm’s average equity partner compensation having leaped 74 percent, to $3.42 million, since 2008, placing it just below Cravath, Swaine & Moore in absolute terms.
In what was a strong showing by West Coast firms, the second-highest RPL growth among The Am Law 200 was seen at Mountain View, California’s Fenwick & West. Its RPL rose at a CAGR of 6.6 percent over the past five years, while the technology and life sciences specialist also ranked 13th for PPP and tied for 12th for VPL, thanks to CAGRs of 11.1 percent and 9.5 percent.
The results of Fenwick, which earned $2.6 million for its representation of Facebook on its $100 billion IPO—the largest tech float in history—are indicative of a resurgent Silicon Valley. Firms based in the global technology heartland recorded average CAGRs in RPL and PPP of 3.7 percent and 6.2 percent—higher than their peers in New York (0.5 percent and 2.5 percent) and Washington, D.C. (0.9 percent and 2 percent), and second only to Atlanta (4.2 percent and 8.8 percent).
"Technology, life sciences, and other innovative companies have continued to perform strongly and drive growth in the larger economy, even when other sectors have not," says Fenwick managing partner Kathryn Fritz.
Irell’s growth has coincided with one of the larger increases in leverage across The Am Law 200—in 2008, the firm had 1.7 lawyers per equity partner; by 2012, that had risen to 2.4 lawyers per equity partner. Irell’s higher leverage is still well below the Am Law 200 average of three lawyers per equity partner, which has remained broadly unchanged during the recession, however, and is dwarfed by the increase at Curtis, Mallet-Prevost, Colt & Mosle.
Already The Am Law 200′s fourth-most leveraged firm in 2008, with 6.6 lawyers per equity partner, Curtis geared up significantly during the recession, hitting 11.4 lawyers per equity partner by 2012. The large increase in associate ranks, which was not mirrored at the partner level, helped the firm achieve a PPP CAGR of 11.3 percent—the 10th-highest among The Am Law 200. It also meant that its RPL fell 7 percent over the five-year period, from $570,000 to $530,000, however, despite Curtis seeing revenue rise at a CAGR of 8 percent—the 22nd-highest across the 200. (Curtis did not respond to requests to comment.)
But even at 11.4 lawyers per equity partner, Curtis still isn’t The Am Law 200′s most leveraged firm—that would be Gordon & Rees, which employs 12.4 lawyers for each equity partner. The San Francisco–based firm achieved solid increases in both revenue and net income during the recession—with CAGRs of 7 percent and 6.4 percent, respectively—but thanks to a 40 percent swelling of its total lawyer head count, suffered drops in RPL, PPP, and value per lawyer. (Value per lawyer, or VPL, calculates net income on a per-lawyer basis and gives a truer reflection of a firm’s relative profitability than PPP, which can be influenced by changes in leverage and partner classification.)
Labor and employment law also proved a buoyant sector of the market during the recession. Leading practices Ogletree, Deakins, Nash, Smoak & Stewart, Jackson Lewis, and Littler Mendelson each recorded five-year gains in revenue, net income, RPL, and PPP. Ogletree and Jackson Lewis performed particularly well, with both featuring in The Am Law 200′s top 10 for revenue CAGR. (Excluding merged firms, Ogletree’s growth in revenue of 64 percent since 2008 was beaten only by Quinn Emanuel.)
One exception was Epstein Becker & Green, which has a large labor practice but suffered the largest proportional fall in revenue of the entire Am Law 200. Despite its extensive health care offering—thanks to the Affordable Care Act, most firms with significant practices in the area recorded above-average growth—Epstein saw its top line dive 24 percent over the past five years. The national firm also suffered one of the sharpest falls in net income, with a CAGR decline of 7.8 percent, but largely maintained its RPL and PPP figures thanks to a dramatic 26 percent reduction in its attorney numbers—second only to Dallas-based Thompson & Knight, which shrank 29 percent during the downturn.
Still, Epstein Becker chair Douglas Hastings says that 2008 to 2012 were "good years" for the firm, which in 2009 refined its strategy to more narrowly focus on labor and health care. "We don’t believe that we suffered during the recession," Hastings says. "We decided that the best way to succeed in this evolving legal marketplace is to have brand and strength in select practices, not to just get bigger and try to cover all practices and industries. We think we’re on the right path."
He adds that work levels in labor and employment remained flat during the recession, and that revenue from its 100-lawyer health care group actually rose from $50 million to $75 million over the period. He instead blames the more than $70 million reduction to Epstein Becker’s top line on a move away from general corporate, litigation, and real estate work. (The firm has retained complementary practices in business, litigation, and employee benefits, however, and will continue to handle some health care–related real estate work.)
Elsewhere, Baker & Hostetler ranked in the top 10 for growth in both revenue and PPP, thanks largely to its work on the liquidation of Bernard L. Madoff Investment Securities—the infamous Madoff Ponzi fraud—which is expected to net the firm some $600 million in fees between 2011 and 2014. (Madoff work accounted for as much as 30 percent of the firm’s $510.5 million revenue in 2012, based on our reporting.)
At the other end of the performance spectrum, it is little surprise that firms with substantial real estate practices were the worst-performing group over the past five years. Two such firms, New York’s Herrick, Feinstein and Boston’s Goulston & Storrs, were among just 14 firms to suffer overall reductions in revenue, net income, RPL, and PPP during the recession. (There is little correlation between the other 12, in terms of size, location, or practice focus. They are: Baker Botts; Debevoise & Plimpton; Dechert; Dorsey & Whitney; Fulbright & Jaworski; Kelley Drye & Warren; Kenyon & Kenyon; McDermott Will & Emery; Patton Boggs; Robins, Kaplan, Miller & Ciresi; Shearman & Sterling; and Willkie Farr & Gallagher.)
Goulston’s position is slightly misleading, however. Whereas most Am Law 200 firms do their accounting on a calendar-year basis, Goulston’s fiscal year ends March 31. Its 2008 fiscal year, which we used as the base for our five-year CAGR calculations, actually ended before the recession hit and therefore provides an artificially high starting point. Viewed from 2009, which serves as a fairer basis for comparison, Goulston posted robust increases in revenue, net income, RPL, and PPP. A Goulston spokesman said that its figures for the year ended March 31, 2013, which will be tracked in our 2014 Am Law 200, will exceed the firm’s record performance in 2008.
At Herrick, managing director George Wolf blamed the firm’s dip on a fall in contingency-based revenue, which in 2012 slumped to its lowest level since 2006. Herrick experienced an uptick in fee-based work and has in 2013 seen growth in a number of areas, such as its dynamic art and sports practices, Wolf adds, and it expects contingency payouts to rebound in the future.
Five years has now passed since Lehman’s collapse, and, in the United States, at least, the recovery is well under way. The U.S. economy officially clawed its way out of a recession in June 2009, bringing to an end one of the deepest downturns in memory. It has been a severely trying period for most Am Law 200 firms, but most have emerged leaner and more efficient. More than half employ fewer lawyers now than they did in 2008; almost 80 percent have increased their RPL.
But while the market has stabilized, Brad Hildebrandt, founder of Hildebrandt Consulting, warns that firms will have to get used to lower rates of growth. "It was actually the boom years that were the aberration—what we’re seeing now is more representative of where the market should be, with slow, steady growth," he says. "People who think we’re going to get back to the sort of growth we saw in 2006 and 2007 are dreaming."