As the economy slowly reeled itself back from the brink in 2010, several of Pennsylvania’s largest firms posted big gains in equity partner profits that often didn’t appear to correspond to comparable leaps in revenue.

In fact, two firms — Dechert and Pepper Hamilton — increased their profits per equity partner (PPP) despite experiencing decreases in revenue and making no major cuts to their equity partner tiers.

The common explanation among firms whose profit growth outpaced their revenue growth was that they were conservative in their spending on non-essentials in 2010.

In fact, one firm head said annual profit increases should be about three times larger than annual revenue increases, but only if expenses are kept on a tight leash.

All in all, 2010 represented a marked upswing from the prior year, which had been one of the toughest the profession had ever seen.

One quick note: 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.

K&L GATES

Pittsburgh-based 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 dip in revenue per lawyer (RPL) of about 1.3 percent, according to numbers provided by the firm.

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.

K&L Gates closed out 2010 with an average 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.

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.

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.

View K&L Gates Chart

DECHERT

Philadelphia-based Dechert saw a 9 percent drop in gross revenue in 2010, bringing in $65 million less than it had in 2009.

The firm earned $648.6 million in revenue in 2010, compared to $713 million in 2009 and $815.9 million in 2008.

The firm’s headcount dropped 8.8 percent between 2009 and 2010 to 756 full-time equivalent lawyers. Between 2008 and 2009, the firm’s headcount dropped by nearly 12 percent.

Dechert grew in profits and profitability, however, while maintaining close to the same number of equity partners.

With The American Lawyer’s new calculations, Dechert saw a 5.5 percent decrease in RPL to $858,000 in 2010 from $908,000 in 2009 and a 2.6 percent increase in PPP from $1.96 million in 2009 to $2.01 million last year. The firm’s average compensation for all partners grew by about 2.5 percent from $1.37 million in 2009 to $1.41 million in 2010.

The firm was able to grow profits at a higer rate than it shrunk the equity partner tier. The firm had 148 equity partners in 2009 under the Dec. 31 cutoff date compared to 146 in 2010, making for a 1.3 percent decline in that tier. The non-equity partner tier dropped by about 3 percent from 106 to 103.

Dechert grew its net profit by nearly 1 percent to $294.3 million. The firm’s profit margin grew from 41 percent in 2009 to 45.4 percent in 2010.

Chairman Barton J. Winokur said the firm’s strategy of focusing on the highest-end work for clients as well as moving quickly to adjust to a changing legal landscape during the recession allowed it to maintain profitability without significantly cutting equity partners and despite seeing gross revenue fall.

View Dechert Chart

MORGAN LEWIS & BOCKIUS

Morgan Lewis & Bockius saw its gross revenue increase 1.5 percent to $1.08 billion. The firm’s revenue per lawyer increased more than 6 percent to $875,000 and its profits per equity partner grew nearly 10 percent to $1.4 million. The firm’s headcount fell 4.4 percent to 1,239 attorneys. The firm was ranked 11th last year and 12th the year before that.

REED SMITH

Pittsburgh-based Reed Smith grew its revenue 1.7 percent from $942 million in 2009 to $958 million in 2010.

The firm was also able to bump up its profit margin a percentage point from 33.6 percent to 34.6 percent, bringing in net revenue in 2010 of $331.7 million.

After seeing headcount drop between 2008 and 2009, Reed Smith moved in the opposite direction in 2010, bumping headcount a little more than 1 percent from 1,433 lawyers to 1,449 last year. The equity partner tier remained virtually flat, moving up from 315 to 316 equity partners year-over-year. The non-equity partner tier grew 3.3 percent from 362 non-equity partners in 2009 to 374 in 2010.

Based on the Dec. 31 cutoff, Reed Smith averaged revenue per lawyer in 2010 of $661,000 and profits per equity partner of $1.05 million. The firm’s average compensation for all partners came in at $677,222. Under the Aug. 31 cutoff date used in 2009, Reed Smith’s RPL was $660,000, its PPP was $1 million and its average compensation for all partners was $652,415.

Though not an exact comparison, between 2009 and 2010 the firm roughly increased its RPL by 0.2 percent, its PPP by 4.7 percent and its average compensation for all partners by 3.8 percent.

While the firm’s headcount barely inched up, its hours billed grew by 3.4 percent from 2.39 million in 2009 to 2.47 million in 2010. That didn’t result, however, in an equal rise in gross revenue.

“To move the revenue needle in this year was not easy,” Reed Smith managing partner Gregory B. Jordan said. “Keeping the productivity up was really a challenge. When there is a lack of demand, price competition becomes more intense and that definitely has an impact on realization and the net results.”

View Reed Smith Chart

PEPPER HAMILTON

Pepper Hamilton’s gross revenue was down about 5.8 percent in 2010, dipping from $333 million in 2009 to $313.7 million in 2010, and RPL slipped about 1.2 percent, from $691,000 to $683,000.

However, PPP rose 1.4 percent from $721,000 in 2009 to $731,000 in 2010 and average compensation for all partners rose about 5.5 percent from $599,000 to $632,000.

Executive partner Robert E. Heideck said the firm had “some extraordinary expenses” in 2009 but was largely able to keep costs down in 2010.

For example, he said, the firm used fewer contract attorneys since several large matters were resolved in 2009.

The firm also decreased its headcount by 4.8 percent in 2010, dropping from 482 lawyers under the fiscal year cutoff date in 2009 to 459 lawyers. Its non-equity partner tier shrank 21.4 percent from 70 lawyers in 2009 to 55 lawyers in 2010, while its equity partner tier grew 7 percent, from 142 lawyers in 2009 to 152 lawyers in 2010.

Heideck said natural attrition and departures, like the firm’s loss of seven Pittsburgh real estate attorneys to Reed Smith, coupled with a reduction in hiring throughout the year as compared to 2005 and 2006 levels, contributed to the drop in overall headcount in 2010.

View Pepper Hamilton Chart

BLANK ROME

Blank Rome saw a 3.4 percent dip in gross revenue in 2010 but managed a 6 percent rise in profits thanks in part to its prepayment of 2010 expenses out of 2009 profits, the firm said.

Blank Rome’s gross revenue dipped from $322 million in 2009 to $311 million in 2010.

Blank Rome had to restate some of its 2009 financial reports, recalculating its net income, number of lawyers, number of equity partners, RPL, PPP and average compensation for all partners. The firm said it hadn’t finished its distributions last year before submitting its 2009 numbers. In its restatements, the net income for 2009 turned out to be $5 million less and the equity partner tier was actually five lawyers fewer, resulting in a larger-than-first-reported RPL and a lower PPP than was first reported.

In comparing the restated numbers for 2009 to the firm’s reported numbers for 2010, Blank Rome increased its profit margin from 30.7 percent in 2009 to 33.1 percent in 2010.

The firm’s RPL dropped 3 percent from $665,000 in 2009 to $645,000 in 2010. The PPP grew 6.2 percent from $650,000 to $690,000 and the average compensation for all partners increased 4.3 percent from $513,000 to $535,000.

Blank Rome’s headcount dropped by less than 1 percent from 485 lawyers to 481. The firm’s equity partner tier decreased 2 percent from 152 equity partners to 149 and the non-equity tier grew 1.8 percent from 109 to 111. Total compensation for the non-equity lawyers increased by $1 million over 2009 to $36 million.

The firm’s billable hours dropped more than the headcount, falling 3.8 percent from $796,000 in 2009 to $766,000 in 2010.

Co-chairman Alan Hoffman said the firm was able to increase profitability despite hour and revenue decreases because of prepayments of expenses, a full-year’s benefit of 2009 layoffs of lawyers and staff and a continued management of expenses. He said the firm was able to get better deals on employee benefits and save on office operations and general administration.

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COZEN O’CONNOR

Cozen O’Connor saw dips in all of its key financial metrics in 2010 after seeing major rises in those figures the year before thanks to a large contingency fee in 2009.

The firm’s gross revenue fell 4.6 percent from $290.7 million in 2009 to $277.3 million in 2010. Cozen O’Connor’s RPL dropped by a similar margin of 4.5 percent from $575,000 to $550,000 and its PPP fell 7.4 percent from $650,000 to $605,000. The firm’s average compensation for all partners fell 6.7 percent from $475,000 to $445,000, according to numbers provided by the firm.

Cozen O’Connor’s profit margin also fell from 32.4 percent in 2009 to about 30 percent in 2010.

In 2009, Cozen O’Connor saw a 23 percent rise in revenue and a 19 percent jump in profits from 2008 due to a large contingency fee coming in that year as well as the addition of more than 65 lawyers from disbanding Wolf Block in April 2009.

Cozen O’Connor CEO Thomas A. “Tad” Decker said at the time that the firm’s 2010 gross revenue, while down from the previous year, was up over what the firm would have had in 2009 without the contingency fee. He said the firm’s financial performance in 2010 actually showed that the group of laterals remained busy and, in fact, even increased hours.

After a year of significant growth in 2009, Cozen O’Connor held its headcount relatively flat in 2010, moving from 505 full-time equivalent lawyers in 2009 to 503 in 2010. The equity partner tier decreased 4.8 percent from 145 equity partners to 138 and the non-equity tier moved from 121 down to 120.

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BALLARD SPAHR

Last year marked the first full year that all of Philadelphia-based Ballard Spahr’s partners were equity partners. And with a total headcount reduction of about 8.6 percent from 488 lawyers in 2009 to 446 in 2010, that resulted in 49.5 percent of the firm having an equity stake.

That nearly 1-1 leverage model is not a common one, with most Pennsylvania firms keeping between 20 and 30 percent of their lawyers in the equity tier.

But for former Chairman Arthur Makadon, nothing changed. A non-equity partner who made a fixed income of $250,000 in 2008 makes the same now. But they now get paid like equity partners do, with some money held back until the end of the year. Makadon said at the time that a number of the non-equity partners made about $40,000 more in 2010 than they expected to because the firm saw a near 22 percent rise in PPP from $430,000 in 2009 to $525,000 in 2010, according to numbers provided by the firm.

The average compensation for Ballard Spahr partners grew 21.7 percent, or nearly $100,000, last year. It also makes sense to compare the firm’s 2010 PPP to its 2009 average profits per all partners (equity and non-equity), since each of those figures included the whole of the firm’s partnership now that all partners are equity. When comparing 2010 PPP to 2009 average compensation for all partners, the firm grew profits from $427,000 in 2009 to $525,000 last year, or 22.9 percent.

No matter how you look at it, the firm’s more than 20 percent rise in PPP is a big switch from the 25 percent cut it took in PPP in 2008. Makadon said the firm was early into the downturn and now is earlier to come out of it.

Ballard Spahr was able to grow its gross revenue by about 1 percent from $270 million in 2009 to $273.6 million in 2010 thanks to a smaller reduction in billable hours than there was in headcount. While the headcount fell 8.6 percent, billable hours dropped 6.7 percent to nearly 828,500 hours. Ballard Spahr’s RPL grew 10.5 percent from $555,000 to $615,000.

View Ballard Spahr Chart

DUANE MORRIS

Philadelphia-based Duane Morris’ gross revenue rose 6 percent and PPP rose 10.5 percent in 2010 due in part to some small rate increases and strong collection activity, coupled with continued cost-containment measures, the firm said.

Gross revenue climbed from $387.7 million in 2009 to $411.1 million in 2010.

Although Chairman John J. Soroko told The Legal last year that 5 to 10 percent of the firm’s revenues in 2009 came from contingency fees and other types of alternative fee arrangements, he said in an interview this year that contingency fees were not as much of a factor in 2010, accounting for less than 4 percent of the firm’s revenue.

Soroko said that along with “modest” rate increases in 2010, the firm was able to collect in 2010 a lot of leftover receivables from 2009.

The average compensation for all partners in 2010 was $540,000, up 5.7 percent from $511,000. RPL rose 3.3 percent from $633,000 to $654,000. PPP increased 10.5 percent from $753,000 in 2009 to $832,000 last year, exceeding the firm’s previous all-time PPP high of $800,000 in 2007.

Meanwhile, Duane Morris’ headcount grew 2.6 percent from 613 in 2009 to 629 in 2010 and the number of equity partners rose 4.6 percent from 130 to 136.

Soroko said the rise in PPP was the result of a continued philosophy of cost consciousness rather than cost-cutting. While it made no layoffs or associate salary cuts in 2010, Duane Morris was already much less leveraged in its associate tier than other firms, according to Soroko.

Soroko said the firm’s PPP actually could have been higher had it not made several “very aggressive” down payments on its 2011 expenses.

The non-equity partner tier shrank 1.8 percent from 221 to 217, while total non-equity partner compensation fell 4.7 percent from $81.2 million to $77.4 million.

View Duane Morris Chart


DRINKER BIDDLE & REATH

Drinker Biddle & Reath saw only a slight rise in gross revenue in 2010 but was able to significantly increase RPL and partner profits through what its executive partner called “expense control.”

Revenue rose 0.8 percent from about $373 million in 2009 to about $376 million in 2010.

Though not an exact comparison, RPL rose 4.2 percent from about $600,000 in 2009 to about $625,000 in 2010.

PPP grew 9.1 percent from about $605,000 in 2009 to about $660,000 in 2010.

The PPP percentage change was not affected by the new methodology because the firm’s 2009 equity partner headcount was the same for both the Aug. 31 and Dec. 31 cutoff dates.

Firm executive partner Andrew C. Kassner said the rise in profits was the result of a cost-conscious approach that included being mindful of occupancy costs and focusing on efficient project management.

Kassner said productivity also increased, while the firm’s overall headcount shrank 4.4 percent from 630 under the Dec. 31 cutoff date in 2009 to 602 in 2010.

This was largely due to a reduction in the firm’s equity partner tier, which dropped 4.1 percent from 193 lawyers in 2009 to 185 in 2010.

While Drinker Biddle’s billable hour total dropped slightly from 2009 to 2010, Kassner said the firm “blew right through” its billable hour budget last year.

View Drinker Biddle Chart

BUCHANAN INGERSOLL & ROONEY


Pittsburgh-based Buchanan Ingersoll & Rooney’s gross revenue stayed almost flat last year, but Chief Executive Officer John A. “Jack” Barbour called 2010 a “spectacular” year for the firm.

The firm’s revenue crept up just 0.2 percent from $249.4 million in 2009 to $250 million in 2010, but profits spiked.

Last year, the firm reported its 2009 gross revenue as $264.9 million but this year restated that figure as $15.5 million less.

According to Barbour, a “clerical error” had led to the inclusion of reimbursed expenses such as filing fees in the U.S. Patent and Trademark Office in last year’s gross revenue figure.

Barbour said those reimbursements amounted to “dollar in, dollar out” transactions and should not have been included as part of the firm’s gross revenue.

But while, based on the adjusted 2009 figure, Buchanan Ingersoll’s gross revenue saw only a slight increase in 2010, Barbour said the firm “far exceeded expectations” in his first full year at the helm since taking over as CEO in July 2009.

Part of the reason for his enthusiasm is that PPP rose 12 percent, from $590,000 in 2009 to $661,000 in 2010.

Barbour said the firm was able to achieve this in part by managing its expenses well and making cuts where they needed to be made, focusing on retaining only “what was essential to our clients.”

The firm’s overall headcount did dip 3.6 percent in 2010, dropping from 421 to 406.

The firm restated its 2009 headcount to exclude 24 government relations nonlawyers. This change was also reflected by the restated 2009 RPL.

Meanwhile, the number of equity partners rose 1 percent, from 101 to 102, and the non-equity partner tier shrank by 8.4 percent, from 95 to 87.

Along with PPP, RPL in 2010 rose 5.5 percent from $584,000 to $616,000, and average compensation for all partners in 2010 jumped 18.5 percent from $437,000 to $518,000.

View Buchanan Chart

STEVENS & LEE

Stevens & Lee was able to increase its gross revenue by 5 percent in 2010 despite seeing a 2 percent drop in headcount and a 7 percent drop in billable hours. The firm was also able to increase PPP 10.5 percent, pushing it to the $1 million mark for the first time.

The firm’s revenue rose from $108.6 million in 2009 to $114 million in 2010, thanks to what firm President Ernie Choquette said was a validation of its business model.

He said the firm spends a significant amount of time researching the economic climate in its local regions and nationally as well as the economic situations of its clients and their industries to determine what services it could best provide. That value-add, along with a lot of time spent cross-selling, resulted in client loyalty during the recession, Choquette said.

He said Stevens & Lee was able to increase revenue even though billable hours went down from more than 312,000 in 2009 to more than 290,000 in 2010 because of about a 3 percent rate increase and the firm’s commitment to alternative fee arrangements.

Choquette said the firm has been implementing more and more fixed-fee and other alternative fee arrangements and has employed an internal tracking system to monitor their success. He said the arrangements have worked out well for both the firm and its clients and now contribute between 20 to 25 percent of the firm’s revenue.

Choquette said there were also a few contingency fees paid in 2010 that were “marginally material” to the top line with the bulk of the hours worked on those cases done in 2009.

After the law firm saw its profit margin fall from 57.2 percent in 2008 to 51.7 percent in 2009, the firm boosted that back up to 54.4 percent in 2010. RPL moved up nearly 8 percent from $635,000 to $685,000. Profits per equity partner reached a milestone, reaching for the first time $1 million. That was a 10.5 percent jump from 2009 when Stevens & Lee’s PPP was $905,000. The firm’s average compensation for all lawyers was up 5.5 percent to $695,000 in 2010.

The firm’s headcount dropped 2.3 percent from 171 lawyers in 2009 to 167 in 2010. After two years of shrinking, the firm’s equity tier remained flat at 62 equity partners. The non-equity tier grew nearly 6 percent from 51 to 54 last year.

View Stevens & Lee Chart


SAUL EWING


After experiencing drops in its gross revenue and RPL in 2009, Philadelphia-based Saul Ewing was able to bolster both along with PPP and average compensation for all partners in 2010 despite partnership tiers that remained nearly flat.

The firm’s gross revenue was $121 million last year, up 5.2 percent from $115 million in 2009.

Meanwhile, the firm’s RPL rose 8.9 percent, from $505,000 in 2009 to $550,000 in 2010, while its headcount dipped 3.5 percent, from 228 lawyers in 2009 to 220 lawyers in 2010.

The firm’s 2009 RPL was only slightly changed by the new calculation. The PPP was not affected.

The firm’s equity partner tier shrunk just 1.2 percent, from 81 lawyers in 2009 to 80 lawyers in 2010, and its non-equity partner tier dropped 2 percent, from 49 lawyers in 2009 to 48 lawyers in 2010.

Average compensation for all partners rose 14.6 percent, from $384,000 to $440,000.

The firm saw its biggest increase, however, in its PPP, which shot up 18.2 percent from $435,000 in 2009 to $514,000 in 2010.

According to managing partner David S. Antzis, this was a record for the firm, which had never had PPP above $500,000.

Still, Antzis added that while the “enormous pressure to maximize PPP” has caused some firms to hastily shed equity partners whose practices have been slow during the recent business cycle, Saul Ewing was able to avoid such cuts and still increase profits in 2010.

Antzis said he’s always believed that a firm’s annual increase in PPP should be about three times its annual revenue increase.

For that to happen, he said, expenses need to be kept under control, which was a high priority for Saul Ewing in 2010.

“Our revenue [increased by] over $6 million and our expenses were static,” he said.

According to Antzis, the firm achieved this not through cuts but rather by “not falling back on old habits.”

View Saul Ewing Chart

FOX ROTHSCHILD


Philadelphia-based Fox Rothschild was the rare Pennsylvania firm whose revenue rose by a higher percentage than its profits per partner in 2010. The firm’s gross revenue in 2010 was about $239.3 million, up nearly 10.3 percent from 2009, when its gross revenue was about $217 million.

Meanwhile, its PPP grew by 3.6 percent, from about $550,000 in 2009 to about $570,000 in 2010.

Firmwide managing partner Mark L. Silow said 2010 was a “year of investment” that included both geographic and practice growth.

Silow attributed the spike in the firm’s revenue partly to the addition of new lawyers.

The firm, with a fiscal year end of March 31, grew its total headcount by 5.6 percent from 429 in 2009 to 453 in 2010.

Along with 14 first-year associates, several laterals joined the firm, helping to ramp up the firm’s equity partner tier 9.8 percent, from 122 to 134, and the non-equity partner tier 7.4 percent, from 68 to 73.

But Silow said the firm’s revenue also grew because many of its existing lawyers had productive years.

“Part of that involved a few alternative fee arrangements, whether they were contingency or bonus fee arrangements,” he said, adding that alternative fee arrangements accounted for about $6 million of the firm’s revenue in 2010.

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