(Credit: Greg Mably)

The stately regatta that is The Am Law 100 kept sailing at a good clip in 2016, but is starting to encounter some unpredictable conditions.

The 2016 Am Law 100 results were rather impressive for an industry facing a number of headwinds, not least of which was flat demand for their lawyers’ time. As a group, the nation’s largest firms managed to grow revenue by 4.3 percent, compared to 2.7 percent a year ago. And profits per equity partner rose by 3.0 percent, slightly behind last year’s 3.9 percent increase.

But a slowdown in the growth of revenue per lawyer may portend trouble ahead for a growing number of firms. RPL, long believed to be the most reliable single indicator of a law firm’s financial health, increased a mere 1.5 percent, the second lowest increase in RPL since 2011. That broadly disappointing number, however, is driven by another ongoing story in Big Law: increasing stratification among firms. The country’s largest firms are still experiencing healthy growth in RPL while that figure is on the decline for their smaller competitors.

Consultants were split on whether the slip in RPL, caused by a rare post-recession spike in lawyer numbers, was an indicator that firms are gearing up for an increase in demand or whether they are failing to manage their head count for the current market. The number of lawyers in the Am Law 100 rose 2.7 percent from a year ago, a significant jump that comes after two straight years in which head count grew by less than 1 percent.

Gretta Rusanow, head of advisory services for the law firm group at Citi Private Bank, was doubtful there would be a more robust rate of growth for big law firms next year. “It’s difficult to project out in a market that has become so volatile. As a broad industry trend, we’ve seen the industry grow at very modest levels for a number of years,” Rusanow says. But Tom Clay of Altman Weil says that the dip in revenue per lawyer growth should not be a concern, noting that positive growth in revenue per lawyer should be viewed in the context of a legal market that remains challenging. “A lot of people kind of forget that we were way down during the recession,” Clay says.

The growth rate among the richest firms has accelerated, leaving the rest of the Am Law 100 further behind in the wake of the wealthy. But in the past year, more than in years past, the legal market featured what may be aptly labelled rogue waves. Individual firms either rode those waves to new heights or were walloped by them. Today’s legal market is simply more volatile than ever.

“It’s more volatile on the revenue side, more volatile on the talent side, and more volatile on the profits side,” says Nicholas Bruch, a senior analyst at ALM Intelligence.

Consider perhaps the most interesting development in this year’s Am Law 100: Kirkland & Ellis’ 15 percent growth in revenue, to $2.65 billion, propelled the firm to the Am Law 100′s second place-ranking for the first time ever. For the erstwhile Chicago firm that now has offices spanning the globe, including an established stronghold in the wealthiest legal market, New York City, 2016 was the culmination of more than a decade of growth in both revenue and profitability. The firm joined rarefied air in growing profits per equity partner above $4 million, a distinction only held by five other New York firms: Wachtell, Lipton, Rosen & Katz; Quinn Emanuel Urquhart & Sullivan; Paul, Weiss, Wharton, Rifkind & Garrison; Cravath, Swaine & Moore; and Sullivan & Cromwell.

Plenty of other firms saw their paths take dramatic turns.

K&L Gates, which has hemorrhaged lawyers and suffered revenue declines in recent years, experienced a dramatic rebound. Revenue at the global firm grew nearly 11 percent and profits per equity partner (PPP) jumped 16 percent to slightly over $1 million. K&L Gates was one of 16 firms that saw revenue grow by more than 10 percent, and one of 20 firms that grew PPP by a double-digit percentage.

Wachtell went in the other direction, although it’s hardly hurting. In 2015, the small-but-mighty M&A shop rode the highest increase in revenue, 18 percent, of any Am Law 100 firm. Along with that impressive top-line growth, Wachtell’s revenue per lawyer (RPL) and PPP each went up more than 20 percent. It was the only Am Law 100 firm to accomplish that feat. But this year, the firm came back to earth, sort of, with an 8 percent drop in revenue and a 12 percent decline in PPP. Wachtell was one of 18 firms with a drop in revenue last year, and one of 20 firms with a decline in PPP. Still, Wachtell leads all firms in profitability, with equity partners pocketing a cool $5.8 million on average. It also tops our rankings of firms by average compensation for all partners, value per lawyer and profit per lawyer, showing how far the firms at the top of the ranking can fall without coming close to hitting their nearest competitors.

Reinforcing the increased volatility in today’s legal market, Jenner & Block was another 2015 standout that may have felt like an also-ran in 2016. The Chicago-based firm that saw the second-highest revenue growth last year at 14 percent had a top-line drop this year of 1.6 percent. Revenue per lawyer at the leading litigation firm fell 12 percent. Jenner was one of 25 firms that had a dip in RPL, though only five firms saw that figure grow more than 10 percent.

Data from Citi confirm the trend of volatility. In 2016, 44 percent of firms who report financial data to the bank had a reversal in their rate of PPP growth from the year prior. Some 25 percent saw PPP rise in 2015 and fall in 2016; 19 percent saw the opposite occur. In pre-recession times, only about 25 percent of firms on average saw a change in direction in their PPP from year-to-year, Rusanow, says.

“The volatility we’re talking about impacts every segment, including those most profitable firms,” Rusanow says. “We’re seeing those characteristics pretty much across the market.”

Kirkland and Latham on Top

With Latham & Watkins holding the No. 1 spot in the gross revenue ranking for the third year in a row and Kirkland’s ascent to the No. 2 spot, 2016 marks the first year in which neither global behemoth Baker McKenzie nor DLA Piper ranked in the top two since 2008.

Baker McKenzie had a strong year, ranking third with gross revenue rising 7.8 percent from the year prior and PPP growing 12 percent to $1.27 million. Skadden, Arps, Slate, Meagher & Flom ranked fourth, with revenue growing 3.5 percent and PPP rising 4.3 percent to $3.26 million. Rounding out the top five, DLA Piper stumbled a bit, with revenue dipping nearly 3 percent from the year prior, but the firm managed to grow PPP by 6 percent to $1.66 million.

Last year was Kirkland’s best in a decade during which it has transformed itself into one of the most profitable and productive firms in the country. The firm grew PPP by 14 percent and RPL by 6 percent. Ten years ago, Kirkland & Ellis ranked No. 7 on the Am Law 100 gross revenue list. Since, it has grown its revenue by nearly 1.5 times, profits per equity partner by 80 percent and revenue per lawyer by 45 percent. By comparison, over the past decade Skadden, a fixture in the Am Law 100′s top tier since the list’s beginning, has grown revenue by 35 percent, profits per partner by 56 percent and revenue per lawyer by 32 percent. This is the first year Kirkland overtook Skadden in revenue.

For Kirkland, 2016 saw a number of longer-term investments pay off in a big way. Foremost among those investments is the firm’s build-out of a Houston office and, with that, its entrance into the energy practice. Kirkland opened in Houston in 2014 with a big hire from Simpson Thacher & Bartlett. The Houston office has already grown to more than 100 lawyers—a feat rarely accomplished by most firms within a decade. Its representation of Energy Future Holdings Corp., starting in 2014, has already led to more than $150 million in fees. The firm has handled nearly a dozen notable energy sector bankruptcies, and the well has yet to run dry. In May, the firm was tapped for Houston-based bankruptcies by two more firms, Ultra Petroleum Corp. and Tulsa-based Midstates Petroleum Co. Inc.

Meanwhile, Kirkland’s's M&A practice has had continued success in both the public markets and private equity space. In recent years, the firm’s private equity practice has made inroads representing massive funds Kohlberg Kravis Roberts & Co. and Blackstone, two clients who have traditionally turned to Simpson Thacher for work. Last year Kirkland represented Blackstone in a slew of deals. Kirkland lawyers also advised KKR on a host of transactions, including acquiring the martial arts fighting company the Ultimate Fighting Championship.

Kent Zimmermann, a law firm consultant at The Zeughauser Group, says that Kirkland is an example of a strategy many other law firms should strive to follow. The firm took an existing strength in bankruptcy and used the lateral market to expand that practice into an industry that had a need for it.

“The lesson other firms can learn from that is that often the most effective way to grow is to extend your existing strength into new areas of focus, whether that’s a new geography or industry,” Zimmermann says.

At the Other End

The Am Law 100 features three newcomers this year: Nelson Mullins Riley & Scarborough; Husch Blackwell; and Shook, Hardy & Bacon.

Columbia, South Carolina-based Nelson Mullins made one of the biggest jumps in rank, leaping 15 spots to grab the No. 88 place on the list. The firm grew its revenue 18 percent to $380 million, continuing a stretch of impressive revenue growth dating back to 2013. In that time, the firm’s gross revenue has grown 41 percent, largely thanks to its investment in Atlanta, where it went from 76 lawyers in 2008 to more than 140 lawyers now. It has opened a string of offices in recent years, most notably in New York City in 2015.Missouri-based Husch Blackwell benefited from its acquisition of 144-lawyer, Wisconsin firm Whyte Hirschboeck Dudek, the fourth-largest law firm merger of 2016, to the tune of a 23 percent revenue jump from the prior year.Shook Hardy returns to the Am Law 100 after a three-year hiatus. The Kansas City-based firm fell off the list in 2012 in part because it stopped representing tobacco company Lorillard LLC in order to focus on a bigger client, Lorillard competitor Philip Morris International Inc. That decision resulted in 17 lawyers leaving the firm and revenue fell about 7 percent in 2012. But it has been on the upswing ever since, growing revenue 3.6 percent in 2016 to $334 million.

Falling off the Am Law 100 were Dorsey & Whitney (formerly No. 98); Hughes Hubbard & Reed (formerly No. 90); and Kaye Scholer (formerly No. 84).

Hughes Hubbard, formerly a regualr entrant on The American Lawyer’s A-List, significantly underperformed against its peers for the second year in a row, slipping out of The Am Law 100 in the process. Revenue fell 10.9 percent in 2016, following a more than 8 percent drop in 2015. The firm’s lucrative work representing the bankruptcy trustee handling the MF Global Inc. Chapter 11 proceedings came to an end last year.

In the year before it merged with Arnold & Porter, Kaye Scholer’s revenue declined nearly 14 percent to $320 million and its profits per equity partner dropped to just over $1 million, a fall of about 25 percent.

What’s Ahead?

Consultants expect the increased volatility of today’s market to continue in 2017. A firm’s fortune could easily flip from the red to the black, or vice versa. In the face of waves of uncertainty, further muddied by stagnant demand, law firm leaders need to steel their nerves and communicate with their partners.

Consultants including Citi Private Bank’s Rusanow says firms that have successfully navigated these waters share some common traits: They are known in certain practice groups as providing exceptional quality. They are not afraid to push for rate increases. And they are managing their head count aggressively, with the use of more flexible leverage systems, such as increased use of contract lawyers.

Clay of Altman Weil says firms should continue to monitor their head count and be more aggressive about monitoring underperforming lawyers. They need to enforce their agreements with clients regarding when and what they’ll be paid. Clay says the momentum in this area has been positive.

“The profession has now begun, and only now begun, to get ultra-serious about issues of realization and pushing their rates,” Clay says. “They’re a little less reluctant to raise rates.”

Rusanow says the firms that are best able to withstand the market’s volatility are those that stay focused on the practices they are best-known for. She also says firms should be more aggressive in seeking rate increases, despite much talk about pricing pressure from cost-sensitive general counsel. “Understand what the market reality is, and stay vigilant,” Rusanow says. “Look to what it is about the firm that will allow you to continue to pull away in terms of performance.”

The one thing firm leaders should expect in 2017: Your ship will be tested by uncertain waters.