K&L Gates continued in 2010 its streak of growing revenue and partner profits, increasing gross revenue by 2 percent and profits per equity partner by 8 percent.
Firm Chairman Peter Kalis said this was the 16th straight year the firm has managed that feat. It did see, however, a slight dip in revenue per lawyer (RPL) of about 1.3 percent, according to numbers provided by the firm.
K&L Gates often grows gross revenue through the addition of large chunks of lawyers via mergers, but in 2010, the firm stayed away from mergers and instead opened three new offices: Tokyo, Moscow and Warsaw, Poland. The Warsaw office brought on the most headcount, with about 40 lawyers from Hogan Lovells.
The firm’s gross revenue grew from $1.03 billion to $1.06 billion due to what Kalis said was simply an uptick in some of its practices. He pointed specifically to litigation, intellectual property litigation and regulatory work. Kalis said the firm’s corporate mergers and acquisitions practice showed some comeback, but the real comeback kid was its real estate practice.
“Let’s just say real estate had some room for improvement,” he said, adding that the practice showed a lot of improvement.
K&L Gates closed out 2010 with an average profits per equity partner (PPP) of $930,000, compared to PPP of $861,000 in 2009. The firm’s average RPL was $599,000 in 2010 compared to $607,000 in 2009. The average compensation for all partners was $545,514 in 2010 compared to $532,724 in 2009.
Legal affiliate The American Lawyer began tracking headcount figures differently this year, making a year-over-year comparison of revenue per lawyer, profits per equity partner and average compensation for all partners a bit tricky considering those metrics are calculated based on the full-time equivalent headcount. The magazine now tracks full-time equivalent lawyers based on a Dec. 31 cutoff date, not the Aug. 31 cutoff it previously used.
Kalis has long said that average RPL will be affected more noticeably at firms with offices in a number of different markets with different pricing models. He said the firm’s 2010 RPL may have dipped because of the lawyers added in Warsaw, who are highly productive but practicing in a market where the pricing model is just different than in many other markets.
K&L Gates inched up its headcount by just under 1 percent, moving from 1,747 lawyers in 2009 under the Dec. 31 cutoff date to 1,763 in 2010. The equity partner tier remained relatively flat, moving from 295 equity partners in 2009 to 294 in 2010. The non-equity tier increased by 1.3 percent from 605 non-equity partners to 613, the firm said.
K&L Gates didn’t do much cost cutting in 2010 through layoffs or other measures, having done much of that in late 2008 through the middle of 2009. Last year was about not “gratuitously” enlarging the firm’s cost structure and holding the line on expenses, he said.
The firm incurred some expense in opening three new offices and moving its Pittsburgh headquarters and all of its back-office staff to a new building in the Steel City. Kalis said the moving of offices of that scale creates a lot of one-time expenses as well as long-term expenses, though the latter can be amortized over several years.
When asked how the firm managed to grow PPP 8 percent when revenue increased just 2 percent and no equity partners were cut nor were major cost-cuts conducted, Kalis said the firm was busier and was able to hold its pricing.
He said the idea that alternative fee arrangements, an increasingly popular form of payment for clients, have to generate less revenue or profitability is not true at K&L Gates. Approximately 40 percent of the firm’s revenues in 2010 came from some form of AFA, compared to a little more than 30 percent in 2009.
K&L Gates has created a menu of “win-win” AFAs the clients can choose from, many of which include a contracted success bonus paid to the firm if it wins a litigation matter for the client, Kalis said.
“And when we don’t prevail, there’s an opposite outcome,” he said. “Fortunately, we’ve been lucky in that we’ve been prevailing for the most part.”
One area where the firm may have saved money was in its non-equity partner tier. The total compensation paid to non-equity partners fell by 1.8 percent, or about $4 million, to $221.4 million even though the non-equity tier grew by 1.3 percent to 613 non-equity partners in 2010. The firm’s ratio of the highest paid equity partner to the lowest paid non-equity partner rose from 16-1 in 2009 to 21-1 in 2010.
Kalis said there was no bulk reduction of pay for non-equity partners.
“We do partner-by-partner compensation analyses for non-equity and equity partners,” Kalis said. “Some of the more highly compensated non-equity partners were promoted into equity so that changes the equation a bit.”
Kalis did tell The Wall Street Journal recently that the gap between the lowest and highest paid equity partner has changed over the years as firms enter more markets and pay more for top talent in markets that require higher salaries. He told The Legal that the equity partner ratio from highest to lowest paid partner is about 9-1, compared to 5-1 about a decade ago.
As to the 21-1 ratio for all partners, Kalis said he wasn’t sure why that changed. He said he doesn’t think that ratio is as meaningful as the one looking solely at equity partners because K&L Gates has non-equity partners in some markets whose salaries are comparable to those of some associates in the New York market.
In looking forward to 2011, Kalis said K&L Gates will be looking to open in new markets and add to existing offices. That already began with the opening of a Brussels, Belgium office earlier this month.
“In 2010, apart from opening three offices in the first quarter, it was a relatively quiescent year on the growth front,” Kalis said. “We spent a lot of time achieving higher levels of integrations and inter-office collaboration. But as for 2011, we’d be disappointed if 2011 were not an aggressive growth year for K&L Gates.”
Ensuring cross-office service for its clients is a big part of K&L Gates’ mission. Kalis said 450 of the firm’s top 500 clients used lawyers in two or more of the firm’s offices. Thirteen of the firm’s 20 largest clients used attorneys in 10 or more of the firm’s offices. The average number of offices engaged on projects by the firm’s 20 largest clients was 12.8. That figure was 9.2 for the firm’s 100 largest clients.
Kalis said 172 different clients each paid K&L Gates in excess of $1 million in fees and the firm’s 100 largest clients equaled 31.8 percent of total firm revenue. •