Reed Smith saw its second straight year of revenue growth in 2011 while profits per equity partner took a dip of nearly 3 percent in a year that saw profit margins squeezed as expenses increased.
The firm’s gross revenue grew 3.7 percent from $958 million in 2010 to $993 million in 2011. Reed Smith saw an increase in demand in 2011, growing revenue and revenue per lawyer (RPL) through a larger jump in billable hours than it saw in attorney headcount.
RPL grew 1.1 percent year over year, inching up from $661,000 in 2010 to $668,000 in 2011. The firm’s billable hours increased about 4 percent to around 2.57 million hours. Headcount grew by 2.6 percent to 1,486 lawyers worldwide. The equity partner tier dropped by three lawyers to 313 partners and the non-equity tier grew 4.8 percent to 392 lawyers.
Reed Smith global managing partner Gregory B. Jordan described 2011 as “a solid year in a tough environment.”
He said demand is still sluggish and there is a lot of price pressure and competition. Even still, Reed Smith looked to continue investing in growth, which he said resulted in profits dipping. The firm brought on 33 lateral partners across the equity and non-equity tiers in 2011, causing profits per equity partner (PPP) to slip, he said.
“Clearly our focus is to continue to grow revenue and, if we do, our profitability will come along,” Jordan said, adding the dip in PPP this year was more a function of recruitment than anything else.
Reed Smith’s numbers show expenses increasing at about an equal rate as revenue, making growing profits while growing headcount a difficult task. The firm’s PPP fell 2.9 percent from $1.05 million in 2010 to $1.02 million in 2011. Average compensation for all partners dropped 2.2 percent to $660,000. The firm’s net income dropped 3.5 percent from $331.5 million in 2010 to $320 million in 2011, causing a dip in the firm’s profit margin from about 35 percent to 32 percent.
Jordan said there was nothing in particular on the expense side that was a major cause for profits slipping. The firm has lower expenses per lawyer than some of its peer firms, he said, because of the lower-cost support operations housed in Pittsburgh. While that helps, it is always a big project to keep expenses under control, he said.
“Those expenses are much more important and much more noticeable when you have a relatively flat environment,” Jordan said.
Part of the firm’s expense increase can be explained through increases in pay for non-equity partners. While the non-equity tier grew 4.8 percent, the pay to that group increased 7.4 percent to a total of $145 million in 2011. Jordan said the firm brought on a number of strong laterals into the non-equity tier, which he said is a very important group for the firm.
Reed Smith also increased its first-year associate salary last year, but those associates were deferred until January 2012.
In 2010, Reed Smith paid Pittsburgh-based first-year associates $110,000 and Philadelphia-based first-years $117,500. When the firm’s 25 first-year associates started in January, they were set to earn $125,000 in Pittsburgh and $130,000 in Philadelphia.
The bulk of the firm’s revenue in 2011 — 56 percent — came from its litigation practices. Corporate work contributed 21 percent of revenue, restructuring brought in 5 percent, real estate made up 6 percent of revenue and the remaining 12 percent was split among other practices. The firm also increased its pro bono hours by 20 percent in 2011.
Reed Smith has a focused effort on entering more alternative fee arrangements in an effort to reduce costs for its clients and increase the firm’s profits. Jordan said he thinks the firm can accomplish both things. He said one-third of the firm’s billable hours last year were done on an alternative fee basis and about one-third of the revenue was generated from those arrangements.
One of the 33 laterals Reed Smith hired was K&L Gates partner David R. Cohen in Pittsburgh. The firm brought him on in May to start an e-discovery practice and a few weeks later 11 lawyers and three staffers followed Cohen to the firm.
The increase in Reed Smith’s headcount could have been even larger in 2011 if merger talks with Dallas-based Thompson & Knight weren’t called off in January of that year. Jordan had said last year that he wanted to finally enter the Texas market in 2011, but that has still not happened. The firm has a busy energy practice that it is hoping would benefit from a presence in the Lone Star State.
Reed Smith has kept busy on the energy side in Pennsylvania with its work on both litigation and corporate matters related to the Marcellus Shale. The firm represented Exxon Mobil in its $1.7 billion purchase last year of Pittsburgh-area energy companies Phillips Resources Inc. and TWP Inc. It represents Chesapeake Energy in litigation related to the shale. Reed Smith also did a lot of work for wind energy company Vestas, he said.
Jordan said the firm is still working on entering Texas and wants to do it the right way.
“We’re very seriously, seriously focused on getting into Texas,” Jordan said. The firm is open to not only large-scale mergers, but smaller groups of laterals as well, he said.
The firm’s large financial services practice kept it busy in 2011, mainly related to lawsuits involving the economic crisis. It counts among its clients Bank of New York Mellon, PNC, Bank of America and Countrywide, which is now part of Bank of America.
Jordan said Reed Smith did billions of dollars of financings for trading companies in the United States and Europe. It also handled life sciences and mass torts work for pharmaceutical companies. The firm represented PCCW of China in the cable company’s $1.3 billion initial public offering on the Hong Kong Stock Exchange.
In November, the firm was hired by Penn State University to advise the board of trustees regarding the Jerry Sandusky sex-abuse scandal. According to a Penn State website, as of Dec. 31, 2011, the firm has shared in nearly $2.47 million in fees paid to it, two public relations firms and former FBI Director Louis J. Freeh’s company, which was hired to represent the special committee of the board investigating the scandal.
“Some of the big successes for the year were litigation; some of them were transactional. They tend to be either in geographies where we have a unique position or those industries where we have a strong position,” Jordan said.
In July, Reed Smith opened a Shanghai office, its third in China. It also created last year an informal practice group of four former general counsel who were made available to offer free advice on “judgment call” questions from GCs of the firm’s clients.
For 2012, the firm will still look to build in Asia, with a particular focus on Singapore. Jordan said that is a major market for shipping and trading, which are two big practices for the firm.
“We’re looking forward to a really good year, but we’re also prepared for it to continue to be more of a challenge than it used to be,” he said.
The firm is projecting an increase in revenue and profits for 2012.
This report is part of The Legal Intelligencer’s early coverage of the 2011 financial results of local firms as part of the Am Law 100 and Second Hundred reports. Full results for The Am Law 100 will be published in The American Lawyer and online in May. The Am Law Second Hundred will be published in June. View our interactive chart, which will be updated as additional law firm financial data is reported.