R. Max Crane of Sills Cummis
R. Max Crane of Sills Cummis (Carmen Natale)

Sills Cummis & Gross, one of New Jersey’s largest and perennially highest-grossing firms saw a drop-off in revenue and a sharp decline in net profits in the last fiscal year.

Gross revenues were down by 3.3 percent to $87.5 million, marking a fourth consecutive year of decline.

Profits also fell for the fourth straight time, by 19.2 percent to $21 million from $26 million.

But the profit loss was largely structural—caused by the de-equitizing of six partners, whose compensation became part of the firm’s overhead.

The ranks of equity partners fell to 25 from 31, a 19.4 percent decline, while nonequity partners increased to 36 from 30. That was accompanied by a 17.4 percent spike in nonequity compensation, to $13.5 million from $11.5 million.

Managing partner R. Max Crane says the adjustment was based on partners’ demonstrated earning capabilities.

“That’s part of the management team here. We all love each other…but it’s still a business at the end,” he says.

“The key to us is, you want to maintain your profits per partner,” which allows the firm to reward its top talent.

With six fewer participants, profits per partner were stable, actually climbing 1.2 percent to $845,000 over the prior year’s $835,000.

And with attrition and layoffs reducing total lawyers by 3.4 percent to 140 from 145, revenue per lawyer remained unchanged at $625,000 year to year.

Crane, addressing the four-year decline, cites a “significant pricing power in the buyers of legal services” that comes with the oversupply of lawyers. “We have…people who are busy, but the fact is clients are more demanding on the price than they’ve ever been,” he says. “It inevitably has an impact on your profitability,” he adds, which in turn exerts pressure on partners to produce more. “Some respond and some don’t.”

Through those four years, PPP has stayed at or close to $850,000—good enough for top five in that category.

“I would rather run a leaner shop and maintain the profitability,” Crane says. “I pay…very little attention to what others are doing, because I know they’re kidding themselves…Revenue is great, but profitability is better.”

On the positive side, the firm’s pension obligation is 96 percent funded and there’s no debt. “We’ve never borrowed,” he says, pointing to the 2012 dissolution and subsequent bankruptcy of global firm Dewey & LeBoeuf, due in part to mounting debt.

Sills Cummis still is hiring laterals and generating organic growth, but the firm is targeting lawyers with established books of business to fill needs in specific practice areas, Crane says.

There are enough opportunities that the firm could employ a much more aggressive growth strategy, but bigger isn’t better in the post-recession legal market, he says.

Sills Cummis is forced to turn away some lower-margin work. If the firm didn’t, “at some point you’re selling your services at a loss,” he says.

The firm has a history of jettisoning unprofitable practices—for example, the former school board practice group a few yeas ago, which Crane said fit better at a smaller firm with less overhead.

The best-performing practice has been healthcare—an “industry practice” requiring expertise in various areas such as regulatory, corporate and real estate, rather than a “departmental practice” focused on one area of law, Crane says.

Real estate is “reasonably robust,” according to Crane, especially in connection with redevelopment deals by corporations relocating to the region. Those types of deals also drive finance, government incentives and labor & employment work, he adds.

Product liability, too, has fared well as price pressure drives some clients to regional firms rather than the large New York, Los Angeles and Chicago firms, Crane says.

Performance also has been solid in corporate internal investigations—the firm typically staffs about a half-dozen former assistant federal prosecutors—and international corporate transactions, mostly from foreign medical device and high-end retail companies looking to expand into the region.

As with other large New Jersey firms, Sills Cummis’ litigation practices have absorbed the brunt of clients’ pricing demands due to the costliness and unpredictability of those matters.

About three-quarters of the firm’s attorneys are New York-admitted, which allows for some competition with New York firms—companies now are farming out some tasks rather than paying the large firms to do everything, Crane says.

With average hourly rates from the mid-$400s to the mid-$600s, Sills Cummis is “certainly a lot cheaper than you’re going to get at Skadden Arps” or another New York powerhouse firm, Crane says.

Despite its revenue and profit decreases, Sill Cummis hasn’t lost much ground in the Law Journal‘s annual ranking of the 20 top-grossing firms.

The firm ranked sixth in gross revenue, the same spot it occupied in last year’s survey. It ranked fifth in the two years before that.

The five-point drop in profit margin, to 24 percent from 29 percent, still is within a point or two of New Jersey’s other top-grossing firms, except for Lowenstein Sandler of Roseland, which reported a 31 percent profit margin. McElroy, Deutsch, Mulvaney & Carpenter of Morristown, along with Newark firms McCarter & English and Gibbons, each reported profit margins of 25 percent or 26 percent.

Sills Cummis ranked 13th in 2013 total profit after ranking 11th, seventh and fourth in the preceding years.

Contact the reporter at dgialanella@alm.com.