Atlanta’s homegrown Am Law 100 and 200 firms prospered in 2017, posting strong revenue and profit growth in what was the best year overall since the 2008 recession for the 200 highest-grossing U.S. firms tracked by The American Lawyer.
More than half of the nine Atlanta-based firms met or outpaced the Am Law 100′s revenue growth, even though that group posted a record average revenue increase of 5.5 percent, up from 4.3 percent in 2016 and the highest jump since the recession.
The Atlanta firms in the combined Am Law 200 ranking range in size from King & Spalding at No. 23, with $1.14 billion in revenue and 1,007 lawyers, to Arnall Golden Gregory at No. 195, with $99.13 million in revenue and 150 lawyers.
While Atlanta’s nine homegrown firms still have a disproportionately large presence, they now make up only one-fifth of the city’s 45 Am Law firms in an increasingly crowded legal market.
In order of revenue, they are: King & Spalding; Alston & Bird; Troutman Sanders; Ogletree, Deakins, Nash, Smoak & Stewart; Kilpatrick Townsend & Stockton; Fisher & Phillips; Morris Manning & Martin; Smith, Gambrell & Russell; and Arnall Golden Gregory.
Stuck in the Middle
Much has been made of the notion that the top 25-grossing firms in the Am Law 200 are pulling away from the rest of the pack and sharply outperforming smaller firms in both revenue and profit growth, because they can command the highest value work that is most impervious to pricing pressures.
While stratification is accelerating overall in Big Law, a look at the Atlanta-based general practice firms as a group shows more of a “barbell” pattern, with higher revenue growth for both the largest and smallest firms in the list and flat growth for those toward the middle.
The city’s top-grossing firms, King & Spalding and Alston & Bird, bested the Am Law 100′s 5.5 percent average revenue growth with increases, respectively, of 7.7 percent and 7 percent. So did Second Hundred firms Morris Manning (8.4 percent) and Arnall Golden (5.5 percent).
Kilpatrick, ranked at No. 80, reported the lowest revenue growth of the group at 1.8 percent.
For the Second Hundred nationally, revenue increased by an average of only 2 percent for the same basket of firms included on the list in 2016. However, average revenue growth actually declined 0.2 percent last year. Some of the highest-grossing firms, such as Atlanta stalwart Sutherland Asbill & Brennan, exited the Second Hundred list because of mergers. Others dissolved, to be replaced by lower-grossing firms.
Sutherland, formerly at the top of the Second Hundred and Atlanta’s fifth-highest grossing general practice firm, dropped off the list this year because of its Feb. 1, 2017, combination with international firm Eversheds, forming Eversheds Sutherland. More than half its lawyers now are outside the United States, so The American Lawyer considers it a global firm.
That followed the departure of another of Atlanta’s largest firms, McKenna Long & Aldridge, from the Second Hundred in 2015, after its acquisition by global megafirm Dentons.
“My take is that many Second Hundred firms are doing as well as firms in the first 100, but not as a group,” Kent Zimmermann of legal consultancy Zeughauser Group told The American Lawyer in May.
“The ones that are outperforming are differentiating in terms of specialties or geography,” he added.
K&S Joins the Super-Rich
That’s not to say the richest firms aren’t getting richer in Atlanta. King & Spalding did pull away from the pack, jumping four spots up the revenue ranking to No. 23, thanks to the 7.7 percent increase to $1.14 billion.
What’s more, King & Spalding has rejoined the “super-rich club,” a category The American Lawyer introduced in 2014 to describe Am Law 100 firms with at least $500,000 in profit per lawyer (PPL) and $1.1 million in revenue per lawyer (RPL).
The American Lawyer introduced the PPL metric in 2015 to control for firms that inflate their PPP by manipulating the equity partner ranks.
King & Spalding initially became a member of the club in 2015, when the criteria was $500,000 in profit per partner (PPP), not profit per lawyer, and RPL of just $1 million. It was benched last year when the criteria changed.
King & Spalding’s PPL of $502,000 and RPL of $1,131,000 made it one of six firms this year to gain admittance to the super-rich group, which now numbers 29.
The firm narrowly missed the $500,000 PPL target the previous year after sharply expanding its lawyer head count. Notably, King & Spalding was able to significantly increase revenue last year while keeping head count flat. It also boosted PPP by 5.5 percent to $2,605,000, thanks to a 4.3 percent increase in net income ($505.1 million) and a slight decrease in equity partners—after a record 10 percent increase in equity partners (18 partners) in 2016.
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Heavier Barbell for Profit Metrics
The barbell pattern for Atlanta firms becomes even more apparent when shifting from a look at revenue growth to the profit-related metrics of net income growth, profit margin and PPL.
Like King & Spalding, the city’s second-largest firm, Alston & Bird, also had a strong year. Alston & Bird’s 7 percent revenue increase to $781.76 million pushed it up two spots to No. 46 in the Am Law 100. It posted Atlanta’s second-highest net income increase, 10.7 percent, giving it PPP of $1,926,000.
However, the highest net income jump for the group, 12.6 percent, was for Second Hundred firm Morris Manning, ranked No. 176. The firm registered PPP of $1,172,000, third after King & Spalding and Alston & Bird.
The barbell pattern is most pronounced when looking at profit margins, which, again, were highest for the largest and smallest firms in the cohort. Am Law 25 firm King & Spalding and Arnall Golden, at No. 195, both posted profit margins of 44 percent. (King & Spalding’s margin dipped from 46 percent the prior year, while Arnall Golden’s increased from 42 percent.)
Alston & Bird (No. 46) shared a 38 percent margin with Morris Manning (No. 176). Troutman Sanders (No. 66) and labor and employment specialist Fisher & Phillips (No. 151) followed at 37 percent.
Consistent with the national phenomenon of firms in the middle of the Am Law 200 feeling the squeeze, Kilpatrick, at No. 80, had the cohort’s lowest margin, 26 percent. Even so, it posted a healthy 6 percent increase in net income for PPP of $1,011,000.
Unsurprisingly, there’s a strong correlation between high profit margins and profit per lawyer. King & Spalding’s PPL of $502,000 was followed by PPL of $363,000 at Alston & Bird. In the next PPL bracket are Second Hundred firms Morris Manning at $295,000 and Arnall Golden at $288,000, followed closely by Troutman Sanders (No. 66) at $282,000.
PPL for the other firms ranged from $203,000 at Fisher & Phillips and $194,000 at Kilpatrick to $159,000 at Ogletree and $157,000 at Smith Gambrell.
Law firm watchers predict a healthy 2018 for Big Law in an economy still considered strong. Demand growth surged in the fourth quarter of last year, according to the Q1 report from Citi Private Bank’s law firm group, and much of the work was still in inventory as the new year began. In fact, 2018 started with the strongest inventory growth figures since 2007 for Citi’s basket of 179 firms, which are Am Law 100, Second Hundred and large niche-practice firms.
Nevertheless, as the legal industry further stratifies and consolidates, plenty of uncertainty remains for law firms. Will gains in demand continue to benefit mainly the very rich, along with a few lucky firms at the other end of the barbell? Or will growth be strong enough to lift them all?