(Credit: Greg Mably)
The Super Rich is the Am Law 100′s most exclusive club. The entry requirements are formidably steep with firms having to demonstrate market-leading financial performance. This year, they’ve become even steeper.
Since the classification was first introduced in 2014, the membership criteria have remained the same. To get beyond the velvet rope, a firm has needed an average revenue per lawyer (RPL) of at least $1 million and average profit per equity partner (PPP) of at least $2 million. No mean feat. At least, it never used to be.
At first, just 20 firms made the grade. But thanks to gains in productivity and profitability across Big Law—and inflation—the group has gradually expanded, rising to 24 firms in 2015 and 28 last year.
Left unchecked, the ranks would have swollen further this year, to 31 firms. A supposedly exclusive club that is open to almost a third of the entire Am Law 100 is, by definition, clearly not exclusive enough.
As such, we have this year decided to raise the bar. To put the “super” back into the Super Rich, if you will.
Analyzing this year’s Am Law 100 data, it quickly becomes clear that the Super Rich’s RPL and PPP hurdles have not only become too low but also imbalanced, with the group now largely determined by the profit metric.
Of the 33 Am Law 100 firms that achieved a PPP of $2 million or higher in 2016, just two failed to hit the $1 million mark for RPL: Dechert and White & Case. The RPL benchmark, on the other hand, is now barely higher than the Am Law 100 average, which rose 1.7 percent last year to $910,000. In total, 43 Am Law 100 firms have RPLs north of $1 million—and more than a quarter of these firms have PPPs of less than $2 million.
RPL is an excellent way to measure a firm’s productivity and the value of the work it handles, and is a key metric used internally by management to assess the performance of their own business, so it should remain a core part of the Super Rich test. The bar just needs to be higher. It turns out that you don’t actually need to raise it too much before the group is quickly whittled down. In fact, upping the RPL requirement by only $100,000 sees the number trimmed by almost a third, to 31—a far more suitable proportion.So, RPL goes up to $1.1 million. But what about PPP?
Instead of increasing the PPP target, we have decided to ditch it entirely. While PPP is perhaps the most widely cited of all Big Law financial metrics, it is actually a poor basis on which to compare firms’ relative profitability. It is heavily influenced by leverage and how tightly a firm holds its equity, while differences in accounting methods and the way in which firms classify partners mean that PPP is not necessarily calculated on a like-for-like basis across the market. This makes PPP susceptible to manipulation, as demonstrated during the recession, when many firms maintained PPP levels in the face of plummeting revenue and net income by de-equitizing scores of partners. (Financial crisis aside, Big Law equity has become an increasingly prized commodity. When The American Lawyer published its first Am Law 50 survey in 1985, 36 percent of all lawyers at those firms were equity partners. In this year’s Am Law 100, less than 22 percent of all lawyers are equity partners. The number of nonequity partners, meanwhile, has almost doubled over the past decade. More than 40 percent of all Am Law 100 partners are now nonequity partners.)
“Elite firms are capturing an ever-greater share of the really valuable work, meaning that even in a relatively flat market, they are still performing well,” says former Clifford Chance managing partner Tony Williams, now principal of London-based consultancy Jomati. “But some of the increase in profitability is down to firms managing their equity more tightly. You’ve got to look at what’s behind PPP, otherwise it can be misleading.”
We are therefore replacing PPP with profit per lawyer (PPL), which is arguably the most accurate and objective way to assess a law firm’s underlying profitability ["Introducing Our New Profits Metric," April 2015]. For the Super Rich, this metric is set at an even $500,000, a level achieved by just 25 Am Law 100 firms in 2016. (As with PPP, PPL requires consistency in head count data in order to ensure its accuracy. The American Lawyer does not include paralegals, trainees, temporary lawyers or contract lawyers in its attorney head count figures.)
The new methodology brings the Super Rich back down to 24 firms [see chart, "In The Club"] and results in four first-time entrants: Baker Botts; O’Melveny & Myers; Williams & Connolly; and Wilmer Cutler Pickering Hale and Dorr.
Baker Botts would actually have joined the group this year even if the criteria hadn’t changed. The firm’s PPP smashed past $2 million in 2016, soaring 36.6 percent to a record $2.47 million, on the back of some big contingency wins.
O’Melveny, Williams & Connolly and Wilmer, meanwhile, become the only Super Rich firms with PPPs of less than $2 million. While this may make them appear less profitable, it is actually due to the fact that they are disproportionately generous when it comes to awarding partners equity status. Their leverage—the number of attorneys (minus equity partners) a firm has for every equity partner—ranges from an extremely low 1.77 at Williams & Connolly to 2.7 at O’Melveny, which is still well below the Am Law 100 average of 3.78. The trio’s lofty PPL figures—Williams & Connolly’s PPL of $575,000 is higher than the likes of Boies Schiller Flexner and Schulte Roth & Zabel—confirm that, as businesses, they are indeed super rich, even if some of their equity partners might not be.
These new members gain their places at the expense of eight firms: Cadwalader, Wickersham & Taft; Cleary Gottlieb Steen & Hamilton; Dechert; King & Spalding; Ropes & Gray; Sidley Austin; Weil, Gotshal & Manges; and Wilson Sonsini Goodrich & Rosati.
All but one of these firms would have remained part of the Super Rich this year under the old standard. Dechert would have lost its place regardless, albeit by the slenderest of margins: its RPL fell 1 percent in 2016 to $995,000, meaning it would have missed out by just $5,000.
Ropes & Gray would even have stayed in the refined Super Rich had it simply maintained its financial performance from the previous year. The firm’s RPL increased 2 percent in 2016 to $1.28 million. But crucially, its PPL dipped below $500,000, dropping 4.9 percent to $490,000.
Cleary also drops out after a similar near miss. In fact, it is the only non-Super Rich firm with a PPL above $500,000. Its PPL was $510,000, but the firm lost its place this year due to its RPL being just narrowly short at $1.055 million. It could be a temporary hiatus, however. Cleary’s RPL grew 4.5 percent in 2016 and if that growth is maintained, it will return to the group in next year’s survey—as as long as its PPL remains above $500,000, of course.
Akin Gump Strauss Hauer & Feld; Fragomen, Del Rey, Bernsen & Loewy; Shearman & Sterling; and Vinson & Elkins all would have broken into the Super Rich for the first time this year had it not been for the change in policy, with each recording gains in RPL and PPP in 2016. Shearman’s PPP rose 18 percent to $2.17 million on the back of a reduction in its equity partner ranks, but its PPL is nowhere near high enough at $360,000. Fragomen is even further off the pace with a PPL of $240,000. Akin Gump and Vinson & Elkins, on the other hand, are both still within touching distance of the refined Super Rich with RPLs above $1 million and PPLs of $480,000.
The same cannot be said for Cadwalader, which the new criteria has revealed to be a significantly less profitable firm than its PPP would suggest. The firm’s PPP once again remained above $2 million in 2016 at $2.1 million. But its partner profits are being artificially inflated by its Am Law 100-topping leverage of 8.73. (Just three other Am Law 100 firms have leverages above 8.0: DLA Piper, at 8.31; K&L Gates, at 8.4; and Lewis Brisbois Bisgaard & Smith, at 8.62.) Its $215,000 PPL, meanwhile, puts it in the bottom quarter of the Am Law 100 by that metric, alongside firms such as Akerman and Reed Smith.
The Super Rich has seen many changes this year but some constants remain. Wachtell, Lipton, Rosen & Katz’s standing as the group’s undisputed leader is undiminished.
Despite a difficult year in which it saw reductions across all key metrics, Wachtell still achieved staggering levels of productivity and profitability with an RPL of $3.13 million and a PPL of $1.92 million. Even among the rarified air of the Super Rich, those figures don’t just put the firm in a different ball park, but an entirely difference league.Wachtell’s RPL is a full $1.4 million higher than the $1.7 million notched by its nearest rival by that metric, Sullivan & Cromwell. Just two other Am Law 100 firms have RPLs above $1.5 million: Quinn Emanuel Urquhart & Sullivan at $1.675 million and Kirkland & Ellis at $1.505 million. Wachtell’s PPL, meanwhile, is 70 percent higher than any other Super Rich firm and more than five times the Am Law 100 average of $360,000. Quinn Emanuel is the only other Am Law 100 firm to pass $1 million in that metric, with a PPL of $1.13 million.
Wachtell’s financial dominance is so absolute that it could even justifiably occupy an entirely separate classification. The Super-Duper Rich, anyone?