(Illustration by Raul Arias)
Only a year ago news about the Second Hundred—firms number 101 to 200 on The American Lawyer’s list of the nation’s top-grossing firms—focused on personnel growth. The firms were adding head count—partners and associates—and betting that there would be more work for more lawyers. A year later, it looks as though that gamble didn’t pay off across the board. Instead, a small set of firms scored positive financial results that belie their size. For many of the others, in 2013, flat results were the new success story.
On average last year, firms improved their top line by 2.6 percent, to $19 billion, a new record. And, in percentage terms, revenue per lawyer (RPL) jumped 2.5 percent, to $626,784. But hardly any of that revenue dropped to the bottom line. Average profits per equity partner (PPP) barely grew, gaining $4,734, or just 0.7 percent, to $701,310. That modest gain came as the number of equity partners in the Second Hundred dropped by 30 lawyers.
The litany of year-over-year losses is telling: Thirty-six firms saw their gross revenue drop; another eight grew by less than 1 percent. Forty-seven firms cut head count; another nine grew by less than 1 percent. Twenty-three firms had lower RPL, 14 were flat and six grew by less than 1 percent. And on PPP, 40 firms showed declines, four held flat and seven increased by less than 1 percent.
Second Hundred firms tend to fit into one of three categories: elite specialist firms, smaller firms in major markets and dominant regional players in second cities where lawyers charge less. As a group, these firms seem to be stuck on a very high plateau. Some are gaining, some are stumbling, but few are enjoying serious growth spurts. If that story sounds familiar, it’s because we told one just like it last month in our Am Law 100 financial report ["The Super Rich Get Richer," May]. There, we divided firms into three groups—20 Super-Rich firms, six super-sized verein firms, and the 74 merely rich large firms we referred to as Everyone Else. In that mix, the 20 Super-Rich firms performed disproportionately well. In percentage terms, their top line grew twice as fast, while their profits per partner jumped four times higher than the rest. The big group of 74 “Everyone Else” firms showed a 2.2 percent gain in gross and a 1.2 percent gain in PPP.
A similar phenomenon occurred last year in the Second Hundred. In that group, 20 firms outperformed the others and actually landed amid the top 100 firms on both PPP and RPL; to use the sports cliché, they all punched above their weight. As with their bigger siblings, they reeled in a disproportionate share of 2013′s earnings. The gross revenue of the 20 grew by 4.6 percent; the rest of the lot on average grew by only 1.1 percent. The top 20′s RPL jumped by 4.7 percent, while the others eked out only an average gain of 0.8 percent. Perhaps most telling, on PPP, the top 20 increased on average by 3 percent, while the others actually dropped by 0.8 percent, or $5,149 a head.
But even the top 20 didn’t move in lockstep. Much of the growth in that cohort belonged to Robins, Kaplan, Miller & Ciresi, the Minneapolis-based litigation powerhouse. The firm had a strong year, punctuated by a $2.7 billion settlement in an arbitration for Mondelez International. Robins Kaplan accounted for roughly half the gain that the top 20 firms made in gross, RPL and PPP. But even without Robins Kaplan, the other 19 firms still grew their gross by 2 percent, their RPL by 1.8 percent, and their PPP by 1.6 percent, all gains that were roughly twice as big as the averages for the other Second Hundred firms.
New to the List
This is the 16th annual report on The Am Law Second
Hundred. 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.
A few firms joined the Second Hundred this year, all after completing mergers. With revenues of $127.5 million, Detroit-based Clark Hill joined at rank 177. The firm made the list after merging last year with Pittsburgh-based Thorp Reed. Phoenix-based Lewis Roca Rothberger appears at rank 183 with revenues of $121.5 million. Lewis Roca combined with Denver-based Rothberger Johnson & Lyons last year. And with gross revenue of $97 million, another Phoenix-based firm, Fennemore Craig, made the list at rank 199. Fennemore acquired a small Nevada firm, Jones Vargas, in 2012.
At the other end of the Second Hundred ranks are three firms who this year slipped off The Am Law 100. Sutherland Asbill & Brennan, a national firm with roots in Atlanta and a prominent Washington tax practice, ranks 101, with gross revenue of $310 million. For those keeping score, we publish Sutherland’s revenue as the same as that of the firm that ranks just ahead of it at number 100, Mintz, Levin, Cohn, Ferris, Glovsky and Papeo. Our published gross revenue numbers are rounded: to break the tie in this case (because only 100 firms can be in The Am Law 100), we used the raw numbers. By that measure, Mintz Levin came out ahead by $37,310.
Joining at rank 102 with gross revenue of $308.5 million is Kansas City, Mo.–headquartered Shook, Hardy & Bacon, a prominent product liability litigation firm. Washington, D.C.–based Patton Boggs was the third firm to drop off The Am Law 100. It was a rocky year for the fabled lobby shop, which ranked 114, with gross revenue of $278 million. The firm shrank—head count was down 10 percent. And both its RPL and PPP were off by 2 percent. For the past year, the firm was in on-and-off publicly reported merger negotiations, which thus far haven’t been consummated. The bad news continued as we were going to press: Patton Boggs agreed to pay $15 million to settle a lawsuit filed by Chevron Corporation for the firm’s role in a controversial environmental lawsuit brought in Ecuador.
Taken as a group, the firms of The Am Law 100 and Second Hundred earned gross revenue of $96.4 billion. With a gross of $19 billion, the Second Hundred’s share of that market slipped a bit last year, to 19.7 percent. Not surprisingly, the Second Hundred firms tend to have fewer lawyers: The median head count is 282 in the Second Hundred, compared with 723 for the Am Law 100. And they earn less. For the Second Hundred, median gross is $181.5 million, and median PPP is $677,500. For The Am Law 100, median gross is $629 million, median PPP $1.34 million.
Secrets of Success
What sets apart the 20 most successful firms in the Second Hundred? Most tend to be a little smaller. Their average head count is 247, compared with 321 for the others. Their equity partnerships are smaller also: an average of 68. versus 105 for the others. And they’re able to command much higher rates. Their average RPL is 50 percent higher: $908,842, compared with $608,717.
These firms are notable for their intense focus and excellent client lists. The best examples are the two firms that lead the Second Hundred on PPP and RPL. With profits per partner of $3.4 million and revenue per lawyer of $1.4 million, Los Angeles–based Irell & Manella qualifies as the 21st member of our Super-Rich list. A step behind is Munger Tolles & Olson, also headquartered in Los Angeles, which showed profits of $1.8 million and RPL of $1.4 million. Munger has a distinction that still eludes Irell, however: Because of its outstanding pro bono, diversity and associate satisfaction scores, it led our A-List of the most elite firms in 2013 ["Perfect Attendance," July 2013].
Both Irell and Munger are famous for their high-stakes litigation. They do a few other things as well, notably Munger’s transactional work for Berkshire Hathaway, where name partner Charles Munger is Warren Buffett’s vice-chairman.
The rest of the 20 are similarly well focused. A few examples: Fenwick & West in Palo Alto is a premier technology firm, the one that helped Facebook go public; Wiley Rein in Washington, D.C., is the go-to firm for D.C. communications and other regulatory work; Chapman and Cutler in Chicago is all finance, all the time; and Choate Hall & Stewart is one of the firms to see for mid-market private equity, tech M&A and wealth management in New England.
Beyond premium clients and premium rates, it’s hard to find commonalities. One size doesn’t fit all: Seven have fewer than 200 lawyers, eight fewer than 300, and the other five less than 400. Nine reduced their head counts last year, while 11 grew; seven reduced their equity partnership, 10 increased them, and three stood pat. Most of the 20 are two-tier partnerships: The three exceptions are Irell, Munger, and New York–based Stroock & Stroock & Lavan.
This is rarefied turf, but others on the Second Hundred aren’t far behind. Another 11 firms rank in the top 100 on either PPP or RPL, but not both. Check this space to see if they climb the ladder.
We all like superlatives, but too much emphasis on the most successful firms might leave the wrong impression. The story gets a little worse the farther back you look. We have five-year full financial records for 87 of the Second Hundred firms. The numbers show that their world has been flat for a while. Consider the following:
• Gross Revenue Since 2008, 22 firms saw drops, and two were flat. Another 11 had compound annual growth rates (CAGR) of less than 1 percent. In all 47 of the 87 firms didn’t keep pace with inflation. (In our calculations, we used an inflation rate of 1.6 percent.)
• Head Count Forty-nine firms reduced their head count since 2008, and another 10 had a five-year CAGR of less than 1 percent. None remained flat.
• Revenue Per Lawyer Over the five years, 11 were down and 10 others had CAGRs of less than 1 percent. In all, 37 firms didn’t keep pace with inflation.
• Profits Per Partner Since 2008, 18 firms dropped, two were flat and eight grew their CAGRs by less than 1 percent. For the group of 87 firms, 32 didn’t keep up with inflation.
• Equity Partnerships After five years, 46 firms had reduced their equity partnerships, and five had held them flat.
These numbers are benchmarks. They are accurate descriptions of what’s happened to the law firm market since the Great Recession began, but as guides to the future, they are perplexing. In an era of low or no growth, what might a law firm do to improve its position, to climb over its equally bedeviled peers?
There seems to be no shortage of suggestions and advice in the marketplace. Take your pick: Add head count! Cut partners! Stick to your region! Head for parts unknown! Or, maybe just the opposite! How are those well-crafted bromides working out in actual practice?
To find out, we sorted the performance of the Second Hundred firms over the last five years. We divided them into two groups, the 50 whose revenue per lawyer matched or exceeded the modest inflation rate, and the 37 that didn’t keep pace with inflation. We chose RPL rather than PPP because it’s simple and reliable—gross revenue divided by lawyer head count—and not susceptible to confusion or gamesmanship over who or what constitutes an equity partner. Also, there’s little disagreement that growing RPL at a gait better than inflation is good for healthy professional services organizations. Here’s what we found:
• Better Of the 50 firms that matched or beat inflation, 24 firms increased their head count and 26 reduced it. Twenty-four increased their equity partnership, 23 cut it and three remained flat.
• Worse Of the 37 firms that fell behind the inflation rate, 14 increased their head count and 23 reduced it. Twelve increased their equity partnership, 23 cut it and two stayed flat.
All of which suggests that there isn’t a single path forward on the high plateau where so many large law firms now find themselves. Nor is there evidence of a single move that will launch growth. Law firm strategy, like politics and family feuds, needs to be intensely local, crafted to abilities and strengths of individual firms. Successful firms tend to play longer games. We’ll watch to see how their choices play out