(Illustration by Raul Arias)
The Am Law 100 showed gains of more than
5 percent in top-line revenue and head count growth in 2013, hitting a new record of $77.4 billion generated by 92,007 lawyers. At the same time, the 100 top-grossing firms in the nation registered flat performances on other key metrics, among them profits per partner (PPP) and revenue per lawyer (RPL). Average RPL was down by 0.4 percent, to $840,963, while average PPP nudged up by just 0.2 percent, to $1,470,022. Those results were in marked contrast to the firms’ performance in 2012, a year that showed across-the-board improvement.
Once The Am Law 100 could take growth almost for granted. That was not the case in 2013. Last year, the RPL and PPP results did not keep pace with inflation. In several important categories­­ firms retreated. Twenty-five firms saw their RPLs drop. Forty-six firms shed lawyers. On profits per partner, 32 firms had dips, even as 50 cut the number of their partners who had equity status. It’s a fair leap to conclude that if fewer firms had reduced their equity partner ranks, even more firms would have suffered PPP drops. Cutting partners tends not to be a growth strategy, except on paper.
The overall year-over-year comparisons, while instructive as a gauge of the big-firm legal market, can also mislead. The outsize performances of a relative handful of firms managed to skew, even warp, the averages. Since the start of the deepest recession the modern legal economy has experienced, The Am Law 100 has grown into a series of microclimates. These subgroups pursue different strategies, compete in different sectors, and have widely divergent results. As such they need to be judged on their own terms, against the performers in their bands. For this year we divide them into the 20 Super Rich, the six Giant Alternatives, and the 74 who loosely constitute Everyone Else.
Simply put, the Super Rich firms—the 20 with PPP of at least $2 million and RPL of at least $1 million—outperformed the financial averages by four or five percentage points while holding head count growth to a mere 1 percent. Average partner profits hovered at $3 million; average RPL at $1.2 million. These firms house 18 percent of the lawyers in The Am Law 100 and earn 26 percent of the fees.
By contrast, the Giant Alternatives—the six globetrotting firms organized as Swiss verein confederations—lagged behind the overall market. Their average RPL fell by 4.7 percent; their PPP was off by 8.2 percent. At the same time, they increased their head count by an average of 31 percent. To offer some perspective, the average verein firm added 695 lawyers last year, a number bigger than the total head count of 47 Am Law 100 firms. Put another way, these six firms hold roughly 19 percent of the lawyers in The Am Law 100 and account for less than 14 percent of the revenue.
So much for the outliers. For the 74 others in The Am Law 100, the Everyone Else group, 2013 was a year of modest, hard-won gains. Gross revenue increased by 2.2 percent, to an average of $631.3 million. RPL was up by 1 percent, to an average of $803,839. And PPP and head count both increased by 1.2 percent to $1.2 million and 785, respectively.
This is the 28th annual report of The Am Law 100. We gathered the data relying on a combination of law firm cooperation and staff reporting. In some cases we make estimates based on reliable information provided by multiple sources.
The American Lawyer provides the only comprehensive financial report on the Am Law 100 firms each May, and, in our June edition, a similar analysis on the Second Hundred firms. There are, of course, other players in this space, notably Citibank and Wells Fargo, who publish—often in our pages—results of their proprietary financial surveys. For the most part our numbers align with theirs. Much of the remaining variation is a result of conflicts in definitions; also, we have data from more firms. Occasionally we have been misled by insecure, inadequate or corrupt law firm managers. We strive to prevent or correct those mistakes. If any of our readers think a law firm might lie to a journalist but not to a banker, we would be happy to introduce them to prosecutors in New York County who will advise otherwise.
A ROILING BUSINESS
Despite 2013′s sobering statistics, almost any discussion of The Am Law 100 becomes a recitation of economic superlatives and success. These are, after all, the lawyers for the One-Tenth of the One Percent. As such, many partners can claim membership in that rarefied stratum too, although most sit at least a few steps below their clients on the wealth ladder. In an era of economic tumult, this is a remarkably stable group: Of the 100 firms, 89 also appeared on the list for fiscal year 2008. (Two of them, Howrey and Dewey & LeBoeuf, died; nine slid onto the Second Hundred.)
But if their presence has been constant, their business has been roiled. According to a litany of reports, demand for big-firm legal services as measured by hours billed has been soft for the last few years. Adding to the pressure, clients regularly demand and obtain discounts on their fees; among the top 50 clients of the average firm, 30 of them receive a cut rate, according to The American Lawyer’s most recent survey of the leaders of The Am Law 200. Blunting that effect, of course, is the firms’ habit of raising rates each year, which often leads to the unintended consequence of clients buying fewer hours but spending more for them.
In response to this business climate, firms have, in general, taken two important strategic steps since 2008. First, they’ve slowed or reduced their head count growth. Forty-three firms were smaller last year than they were in 2008; 13 grew by less than 1 percent or stayed flat. Lawyer growth isn’t over, but it does seem concentrated. Last year, head count in The Am Law 100 jumped by 5,066 lawyers, or 5.8 percent. Roughly 82 percent of that growth came from two verein firms—Norton Rose Fulbright and Dentons—both of which consummated several far-flung and enormous combinations.
Second, firms have reduced their ownership class. Forty-five firms had smaller equity partnerships last year than in 2008; another 13 grew by less than 1 percent or remained flat. If the pie isn’t expanding, cutting fewer slices benefits those who remain standing and billing. Leaving aside the six verein firms and their ancestors, between 2008 and 2013 the number of equity partners in The Am Law 100 dropped by 3.29 percent, from 17,477 to 16,902. Last year the number of equity partners rose by 25, a jump of 0.1 percent.
Firms continue to promote associates to partner and, as our report on laterals in the February issue showed, recruit laterals in record gulps. But these additions come at a slower rate than the pace of retirements, demotions and departures. Also, firms have rapidly expanded their nonequity partner ranks. Among the 94 nonverein firms, the nonequity group increased by 550 partners last year, for a gain of 4.9 percent. This is the fastest-growing personnel category in The Am Law 100.
With all that maneuvering, Am Law 100 firms have kept pace with, or stayed ahead of, the broader economy in the past five years. Since 2008, average revenue per lawyer barely outpaced inflation, beating the rate by just 0.005 percent, while average profits per partner exceeded inflation by a full 8 percent. That’s not shabby, but it’s a far weaker record than what the firms achieved earlier in this century. For example, since 2004, average revenue per lawyer beat inflation by 5 percent and profits per partner by 24 percent. All of which means 2004 to 2007 produced a great economic run, while 2008 to 2012 brought most firms back to earth.
THE SUPER RICH FLOURISH
It turns out that the Super Rich really are different. Since 2008, the 20 Super Rich Firms have grown their top line by 20 percent, their RPL by 14.4 percent and their PPP by 31.7 percent. They’ve done this with modest growth—head count up 5 percent, equity partners up 4.3 percent—and building on their base strengths, which tend to revolve around the New York market. Of the 20, 12 are primarily New York firms. The other eight, which we define as National or International, include two—Skadden, Arps, Meagher, Slate & Flom and Cleary Gottlieb Steen & Hamilton—that started as New York firms and still have major offices there. The other six all have large offices in Manhattan.
These are the firms once referred to as the “bulge bracket,” that, some suggested, would come to grief in the wake of the financial crisis. Didn’t happen. Instead, the firms prospered by winning a disproportionate amount of the limited deal work that continued during the Great Recession and also rushing in as the highest-priced bacon-savers for banks and other teetering institutions that faced investigations and shareholder suits. And two enjoyed the rewards of risky contingency bets—Quinn Emanuel Urquhart & Sullivan and Boies, Schiller & Flexner—that added to their coffers.
But other than their New York presences, their results—15 of 20 improved both their RPL and PPP totals since 2008—and their enviable client lists, these firms did not pursue the same strategies. A little more than half grew: 12 increased their head counts and 11 added equity partners. Those who chose to cut came in different sizes and shapes. Skadden, a New York and global money-center player, reduced its head count by 330 lawyers, or 16.5 percent. Cadwalader, Wickersham & Taft, a far smaller but even more highly leveraged New York financial house, cut its head count by a similar 16.4 percent, or 86 lawyers, and its equity partners by 21, or 27.3 percent. The remaining 56 partners can all fit into Skadden’s main reception area with room to spare.
The point here is that for these 20, there was a great deal of complex, expensive work available. But even at this elite level, limits were recognized. In fact, six of the Super Rich reduced both their head count and partnership ranks: Along with Skadden and Cadwalader, the other four were Cravath, Swaine & Moore; Debevoise & Plimpton; Paul Hastings; and Willkie Farr & Gallagher.
And even among those 20, some performed better. Since 2008, just eight improved their RPL and PPP results while adding head count and increasing the size of their equity partnership. In other words, they defied gravity: more lawyers, partners, revenue and profits. They are: Cleary; Gibson, Dunn & Crutcher; Kirkland & Ellis; Milbank, Tweed, Hadley & McCloy; Paul, Weiss, Rifkind. Wharton & Garrison; Simpson Thacher & Bartlett; Sullivan & Cromwell; and Quinn Emanuel.These 20 firms are pulling away from the pack. The gap between the average Super Rich RPL and Everyone Else grew by 34 percent, to $432,000 per lawyer. The profits chasm increased by 45 percent, to about $1.7 million per partner. This is of only academic interest to most lawyers, unless and until one or more of the Super Rich firms decide they need a specialist partner and start recruiting among the Merely Rich firms.
BEHEMOTH FIRMS EXPAND
One of the most remarkable developments of the last half-decade has been the rise of the large verein firms, which we’re calling the Six Giant Alternatives. These coalitions, organized under Swiss partnership law, allow otherwise independent law firms to band together under a common name, keep their finances separate for the most part, and integrate their operations and practices as they choose. Some are as cohesive as more conventional law firms that have spread across the globe, but others less so. The six vereins are Baker & McKenzie, Dentons, DLA Piper, Hogan Lovells, Norton Rose Fulbright and Squire Sanders.
While they keep their own regional books, they want to be judged as single institutions. In terms of building scale, they appear to have succeeded; they are certainly larger than they ever were. Indeed, five of the six are now among the top 20 on The Am Law 100 in terms of their size and gross revenues. But because they operate in dozens of jurisdictions where fees and compensation fall well below standard U.S. big-firm rates, rolling their financial performances into one lump sum puts five of the six in the bottom 20 of our RPL charts. Only Hogan Lovells, with a disproportionate number of lawyers in Washington, D.C., and London, made it into the third quartile on the Am Law 100 ranking of revenue per lawyer.
Is it fair just to confine them to—and judge them in—a narrow silo? On their own terms, they are trying to play across the global legal marketplace. Only a handful of firms have made a similar commitment to that strategy. It’s instructive to lump them together with the vereins to see how they fare.
By our definition, an international firm is one in which 40 percent or more of its lawyers are located outside the United States. Five firms meet that definition: Cleary, Fragomen, Mayer Brown, Shearman & Sterling and White & Case. But Fragomen is an immigration specialist working on a narrow approach. So for comparison purposes, we’ll drop it from the list and add two firms we otherwise classify as National—Jones Day and K&L Gates—each of which has more than 20 offices outside the U.S.
So where do the six vereins fall on the list of a dozen global players of similar size and intent? Still at the top when it comes to size and revenue. And still at the bottom when it comes to revenue per lawyer. Hogan edges out Jones Day on the RPL list for fifth place. K&L Gates finishes tenth, third from the bottom. The picture changes on profits per partner, with DLA coming in fourth place, Hogan sixth and Baker seventh.
MIXED RESULTS FOR OTHERS
Which brings us to Everyone Else, the 74 firms that don’t fit neatly into the other two categories. There’s some trouble here, also a wide range of activity. While we can report that as a group these firms showed increases of 1 to 2 percent in most revenue categories, the progress was far from uniform. Compared to 2012, 25 earned less money last year, 23 saw revenue per lawyer drop, and 29 had reduced profits per partner. They were split on head count: 37 increased their size; 36 cut lawyers. Forty-one reduced their equity partnerships, and 31 increased them. Two stayed flat on both size and equity partners.
Most swings were modest; only a handful of firms saw double-digit growth or drops last year. The view from 2008–13 was on some measures more consistent. On average, gross was up 9.9 percent, RPL up 6 percent, and PPP up 16.4 percent. During that period, head count increased by 3.7 percent and the size of the equity partnership barely budged, up 0.2 percent. But there were pockets of woe. Most firms managed to eke out growth, but 20 lost gross revenue during that period, nine declined on PPP performance and eight suffered losses on their RPL. Head count was mixed: 38 firms were larger, 35 smaller. Similarly on equity partnerships: 36 grew and 36 contracted.
Of course, these 74 firms are not monolithic. They include national giants, regional players and single-city operations. Some serve as niche players with highly defined profiles. Others will do nearly anything for any client who comes calling.
How are they doing? As with politics, all results are local. We don’t have room to examine each firm. Another way to assess their economic performance is to look at The Am Law 100 as a set of four quartiles. On that measure, how have they fared since 2008?
To answer the question we chose two measures, revenue per lawyer and profits per partner. Then we divided the 100 firms into quarters and computed the average for each quartile on both RPL and PPP. We found two constants. First, whether we started in 2004, 2008 or 2012, we found the averages grew over time. Second, and more compelling, we found that the gap between the quartiles—first versus second, second versus third, third versus fourth—grew on each measure. While individual firms may have slipped down the ranks, on average each quartile did better and yet still fell farther behind competitors one layer up.
So, let’s review. The averages say that firms are earning a bit more and taking home about the same. Clients are showing no signs of reducing their cost pressures, at least for work that they don’t deem vital. A small group of firms seem to have broken away from their Am Law 100 peers, lengthening their lead each year. Big Law is on a treadmill that keeps getting faster, and clearly not everyone can keep pace. Given the wealth that is getting transferred to law firms from their clients there is still no cause for a pity party. But if your law firm is unsettled or heaving, you’re not alone.