(Photo: Diego M. Radzinschi/ALM)

In what firm leadership called a “solid” 2016, Reed Smith held profits per equity partner and revenue per lawyer steady amid declines in head count and overall revenue.

Gross revenue dropped 4.3 percent, from $1.123 billion in 2015 to $1.075 billion in 2016. Total lawyer head count declined by 5.1 percent, from 1,618 lawyers in 2015 to 1,536 in 2016.

Global managing partner Sandy Thomas said the firm’s objective for 2016 was to grow profits per equity partner (PPP) and revenue per lawyer (RPL) while managing head count. That began with a round of layoffs early in the year, when the firm shed 45 lawyers in the United States, Europe and the Middle East.

“We ran a smaller firm by 5 percent during 2016, and that’s obviously going to have an effect on revenue, which it did,” Thomas said. “We’ll keep up our discipline and pay close attention to calibrating head count with demand.”

RPL was flat, increasing 0.7 percent to $700,000 in 2016. PPP also was flat, increasing by 0.5 percent to $1.11 million. That follows a 2015 in which the firm saw PPP drop by 8.3 percent from the year before.

Net income decreased by 3.8 percent, from $340.5 million in 2015 to $327.5 million in 2016.

Thomas said, in addition to the head count decline, the exchange rate had an effect on revenue, due to the firm’s high concentration of work in the United Kingdom. He said he couldn’t quantify the foreign exchange effect.

Controlling Head Count, Costs

The firm didn’t have additional rounds of layoffs in 2016, Thomas said, but it did maintain “customary rigor” in assessing lawyers’ productivity and head count vs. demand.

The firm also lost a group of lawyers in the Pittsburgh office, when partner Mary Hackett and a group of financial services litigators left for McGuireWoods. But Thomas said that did not have a significant impact on revenue and that the firm maintained relationships with the clients that group served.

Thomas said the firm exceeded its budget expectations for the year.

Reed Smith looked to cut real estate costs, Thomas said, shrinking a number of offices last year in terms of square footage per lawyer. The firm finished renovations in New York, Washington, D.C., and Tysons Corner, Virginia. It also worked to control costs by relying on staff attorneys and an e-discovery group that can scale up and down with demand, Thomas said.

Reed Smith raised first-year salaries to $180,000 in some markets and to $160,000 in Philadelphia and $145,000 in Pittsburgh. Thomas said the raises were anticipated in some locations, but Cravath, Swaine & Moore also forced the firm’s hand when it bumped first-year salaries to $180,000, kicking off a wave of associate raises at U.S. firms.

“We’re budgeting for it, and there’s 1,000 different answers about how the firm is paying for that,” Thomas said. “We as the partnership see it as important.”

Looking Ahead

While demand was relatively flat industrywide in 2016, Thomas said 2017 has started strong for transactional practices, and litigation work seems to be holding steady.

Thomas said he expects to continue making investments in the firm’s core sectors of life sciences, financial services, energy and natural resources, shipping and media. He also said real estate has become a major focus for the firm, so investments in that practice will continue.

The firm started 2017 with the addition of 50 lawyers from King & Wood Mallesons in London, Paris and Germany. Thomas said the firm has accounted for those additions in its head count management strategy.

“I’m expecting really high quality lawyering and just a huge degree of cross-selling,” Thomas said.

Another deal the firm had considered in 2016, but which ultimately fell through, was a potential merger with Pepper Hamilton. The talks became public in the spring, and ended abruptly in late April. ”I can’t add much of anything to the reporting that happened at the time,” Thomas said.

The firm is not looking to restart talks with Pepper Hamilton, he said, but is open to other potential mergers.

“We have a lot of experience with successful mergers,” Thomas said. “That is an analysis that we are always making. Where can we grow by combination?”

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