In 2002, Am Law 200 firms in Pennsylvania were slowly starting to creep out of the 2001 dot-com recession, thinking again about how they would grow revenue and profits. Ten years and another recession later, those firms were certainly successful at reaching all-time financial highs, but some hit their peaks a few years ago and the gap between the rich and not-as-rich has widened.
When The American Lawyer issued the Am Law 200 for 2003, which tracked firms’ 2002 financial performance, there were 15 Pennsylvania-based firms on the list. Two — Wolf Block and Schnader Harrison Segal & Lewis — have since fallen off, and Stevens & Lee joined in 2005. Thirteen firms were ranked on either the Am Law 100 or 200 in both 2003 and in 2012, and it is those firms’ numbers for the last decade The Legal has examined.
Who had a successful decade amid one of the toughest recessions the country has ever seen depends on which metric one holds dear.
If gross revenue growth is king, then K&L Gates, Reed Smith and Fox Rothschild have powered through the last 10 years, growing revenue 276.4 percent, 216 percent and 184 percent, respectively. Much of that had to do with large-scale mergers or group acquisitions. Those three firms also have the largest headcount increases over the past decade. K&L Gates grew headcount 188.4 percent, Reed Smith grew it 114.7 percent and Fox Rothschild grew 124.3 percent.
If revenue per lawyer (RPL) is where it’s at, then Dechert, Pepper Hamilton and Morgan, Lewis & Bockius came out on top with respective 10-year growth in RPL of 71.4 percent, 70.4 percent and 68.9 percent.
If profits per equity partner (PPP) is the picture of health, then Dechert, Morgan Lewis and Reed Smith had the strongest showing, increasing PPP 139.8 percent, 108 percent and 106 percent, respectively.
What’s clear is that firms grew PPP at much higher rates than they did RPL. And, not surprisingly, firms that shrunk their equity partner tiers saw some of the largest increases in PPP, though that wasn’t always the case, as K&L Gates, for example, grew its equity tier the most of all 13 firms, at 54.4 percent, and saw an 81.6 percent jump in PPP, which was one of the larger increases over the 10-year span.
The other noticeable trend over the years is that the gap between the firms when it comes to key metrics has widened.
In 2003, Dechert, at $880,000, had the highest PPP of the 13 Pennsylvania firms ranked both years. Saul Ewing had the lowest at $345,000 — a ratio of about 2.5-1 from highest to lowest. In 2012, Dechert had PPP of $2.11 million and Saul Ewing had $500,000 — about a 4.2-1 ratio. During the 10-year span, the 13 firms averaged a collective increase in PPP of 82.1 percent.
In 2003, Morgan Lewis had the highest RPL of the 13 firms at $530,000 and Cozen O’Connor had the lowest at $400,000, a 1.3-1 ratio. In 2012, Dechert had the highest RPL at $900,000, which was nearly 1.7 times higher than the lowest firm, Fox Rothschild with $545,000. The average RPL among the firms increased 22.4 percent over the 10 years.
In 2003, Morgan Lewis had the highest gross revenue of the 13 firms at $557.5 million. Fox Rothschild had the lowest revenue at $90.5 million, making for a 6.2-1 spread between the firms. In 2012, Morgan Lewis brought in $1.16 billion in revenue, while Saul Ewing brought in $122.5 million. The spread between the highest- and lowest-earning firms grew from 6.2-1 in 2003 to 9.5-1 in 2012. The average revenue rose from $227.6 million in 2003 to $502.8 million in 2012, a 121 percent jump.
Regardless of what turns their finances took, for the most part Pennsylvania firms didn’t have drastic moves up or down the Am Law rankings, which are based on gross revenue. Those in the Am Law 100 in 2003 were there in 2012 despite what may have happened in the intervening years, and those on the Am Law 200 were largely still there 10 years later.
One of the biggest changes was Pepper Hamilton leaving its spot on the Am Law 200 at 111th in 2003 and firmly joining the Am Law 100 over the course of the decade, ending up at 87th in 2012. Fox Rothschild has moved up the most in 10 years, rising 67 places from 185th to 118th. The firm’s RPL and PPP didn’t rise as much as others, however, with RPL growing 26.7 percent and PPP rising 53.9 percent over the decade.
Edge International consultant Ed Wesemann said rises and falls in RPL at large firms have pretty much tracked the economy. Some firms’ RPL skyrocketed by 2007 and crashed in 2008 and those firms are crawling their way back, he said. Other firms have been a little more even-keeled.
While gross revenue is the metric used to track Am Law 200 firms, Wesemann said growth in gross revenue can be a bit deceiving.
“For a lot of firms, the most profitable thing they could do is become smaller,” he said.
The recession was a great opportunity to lay people off and get rid of underperforming partners, Wesemann said.
Law firms are built on a model of never wanting to decline a client opportunity, and they keep people on staff in case an opportunity comes in the door, he said. No other industry can afford to keep that inventory on the shelf anymore, he said, and law firms are no different. The very successful firms are saying they can’t do it anymore, Wesemann said.
Dechert has certainly fit that model, reducing headcount and revenue in the nearly four years since the latest recession hit. In 2011, the firm turned that around, growing revenue for the first time in four years. The firm has never been shy about its goal of going after the most profitable work and shedding practice areas or partners that don’t fit that model.
Over the last 10 years, the firm has grown revenue 80.1 percent, RPL 71.4 percent and PPP 139.8 percent. The firm’s headcount, however, has only increased a net 5.5 percent and its equity tier shrunk 19.9 percent.
Wesemann said firms that do a lot of mergers tend to “knock the hell out of” their leverage for a time, bringing on more partners than associates. Firms that don’t do many mergers, such as Dechert, have seen their equity tier decrease over the last decade, he said.
As firms have shed associates during the recession, RPL has increased because more senior-level lawyers who charge at higher rates are doing the work, Wesemann said. And expense cuts have made law firms inherently more profitable, he said. As the economy improves and firms start to hire younger attorneys again, RPL may dip.
For a number often touted by firms and consultants as the true picture of financial health, RPL has certainly grown the slowest of all financial metrics in the last 10 years. That may be slightly deceiving, however, considering the only way to grow RPL is through increased hours or increased rates, and those two things aren’t happening that frequently these days.
Moving forward, the focus will continually be on increasing PPP, Wesemann said.
“The driving motivation is the fact that partners want to make as much money as they made last year,” he said.
That has created a growing spread between the highest- and lowest-paid partners as firms pay top performers more to keep them. Firms will do whatever they have to in order to maintain profitability, and that may mean cutting partners or unprofitable practice areas, he said.
Definition of Success
Defining what makes a financially successful firm is tough to do. Wesemann said there are typically four types of large-firm lawyers, and many firms have some from each category. There are lawyers who want to make as much money as possible, there are those who think large firms provide the most interesting work, there are those who want to meet a certain lifestyle and don’t want to do work beyond what it takes to meet those goals and there are those who have certain social or political aspirations, he said.
Every firm’s culture when it comes to what equals success is different and profitability isn’t always the main driver, Wesemann said
There are law firms in South Dakota with PPP of $120,000 and they are “happy as clams,” he said.
And there is no correlation between being profitable and staying in business, Wesemann said, pointing to the demise of profitable firms like Heller Ehrman and Dewey & LeBoeuf.
The firms that do the best, Wesemann said, are those that don’t grow beyond capacity within a respective geographic market, grow strategically and probably not through many mergers, and are good at weeding out practices and partners that do not meet their profitability goals.
Where They’ve Come From
• Morgan Lewis — The firm has grown revenue 108 percent, RPL 68.9 percent and PPP 108 percent while only increasing headcount in the last 10 years by 23.2 percent. The firm has picked up large groups from disbanding firms but has stayed away from large-scale mergers. The firm was ranked 17th in 2003 and 13th in 2012.
• Reed Smith — The firm has done a number of large-scale mergers over the years from California to Chicago to London and Hong Kong. It moved from 54th place in 2003 to 19th in 2012. The firm’s gross revenue grew 216 percent while RPL has increased 47.3 percent in the last 10 years. PPP jumped 106 percent, headcount 114.7 percent and equity partners 71 percent.
• K&L Gates — The firm jumped 49 spots up the Am Law charts in the last decade, moving from 66th to 17th place. While revenue shot up 276.4 percent and headcount jumped 188.4 percent, RPL grew 31.5 percent and PPP increased 81.6 percent. The firm has entered a number of large-scale mergers across the country, has opened several new offices and is very active in the lateral market.
• Duane Morris — The firm has risen from 83rd to 70th in the rankings, with a 106.7 percent jump in gross revenue despite growing headcount at about half that pace, or 49.2 percent. Duane Morris increased RPL 38.1 percent and PPP 93.3 percent. The PPP growth was helped in part by a 2.8 percent decrease in equity partners over 10 years. Duane Morris has been focused on international expansion in the last few years, opening offices or creating affiliations in places like Vietnam, Singapore and Mexico.
• Drinker Biddle — Drinker Biddle rose from 85th to 74th over the 10-year span, growing revenue 93.7 percent, RPL 41.5 percent and PPP 44.9 percent. The firm did undergo a large-scale merger with Chicago-based Gardner Carton & Douglas in 2007. Drinker Biddle’s headcount rose 36.2 percent over 10 years and the equity partner tier increased 26.5 percent.
• Blank Rome — Blank Rome fell three spots over the years, landing at 95th in 2012. The firm’s gross revenue increased 65.5 percent, its RPL grew 32.3 percent and its PPP rose 41.3 percent. The firm has grown substantially in Washington and New York over the years and has expanded abroad to places like Hong Kong and domestically to cities such as Los Angeles. Its headcount has grown 24.5 percent and its equity tier has decreased 9.7 percent.
• Cozen O’Connor — Cozen O’Connor has focused on expanding its litigation and insurance recovery base to include more on the corporate side of the practice, which now makes up about one-third of its revenue. The firm’s gross revenue has grown in 10 years by 70.9 percent, but that hasn’t been enough to move it from 100th place, where it was ranked in 2012 and 2003. The firm’s RPL rose 46.3 percent in that time and its PPP rose 57.8 percent. The firm’s headcount increased 17.2 percent and the equity tier grew 27 percent.
• Ballard Spahr — The firm dropped two spots to 103rd in 2012 from its place in 2003. Gross revenue rose 69.1 percent, RPL 44 percent and PPP 47.2 percent. Headcount grew 17.1 percent, and, two years into moving to one-tier partnership, the firm’s equity tier has increased 40.1 percent since 2002. The firm has not opened offices abroad, focusing instead on places like Las Vegas, Phoenix, Atlanta and Los Angeles.
• Buchanan Ingersoll — The firm has moved between the Am Law 100 and 200, settling in at 115th in 2012, down from its 106th-place rank in 2003. The firm’s revenue rose 56.5 percent, RPL 39.3 percent and PPP 65.5 percent in 10 years. It has undergone a number of mergers, with the largest being its 2006 intrastate acquisition of Klett Rooney Lieber & Schorling. The firm’s headcount grew 11.9 percent in the 10-year span and its equity tier increased 21.2 percent.
• Pepper Hamilton — Without any large-scale mergers or acquisitions, Pepper Hamilton has increased revenue 105.4 percent in 10 years. The firm’s RPL grew 70.4 percent, its PPP grew 88.9 percent, headcount rose 20.6 percent and the equity tier jumped 51.9 percent.
• Saul Ewing — The firm has grown revenue 32.4 percent in 10 years, moving from 181st to 177th. Its RPL increased 38.3 percent and PPP rose 44.9 percent. Saul Ewing has decreased in size over a decade, with headcount decreasing 3.9 percent. The equity tier fell 17.8 percent.