After a challenging 2016, Pepper Hamilton recovered some ground in profits per partner last year amid partner departures and a slight dip in revenue.
Pepper Hamilton saw revenue decline by 1.7 percent, from $347.5 million in 2016 to $341.8 million in 2017, as total head count shrank. But profits per equity partner increased by 14.3 percent in 2017, reaching $837,000 distributed among a smaller equity partnership. Partner profits are still shy of the $1 million mark the firm hit in 2015, meanwhile.
Revenue per lawyer was $760,000, up 6 percent from 2016. And net income, at $101.3 million, was up 4.9 percent.
The firm saw greater hours per lawyer in 2017, firm chairman Tom Gallagher said, and billing increases were below 3 percent.
“It’s a tough environment out there,” managing partner Tom Cole said, with regard to billing rate increases.
Departures, Then Recruiting Changes
Pepper Hamilton saw a number of departures at the beginning of the year, with a total of 23 partners leaving throughout 2017. They included three employee benefits partners who went to Blank Rome, and four lawyers who focused on institutional response to sexual misconduct, led by partners Gina Maisto Smith and Leslie Gomez, who departed for Cozen O’Connor.
The firm also hired seven partners laterally in 2017.
In a February 2017 interview, Gallagher said the departures from preceding weeks would have no material impact on the firm. One year later, he said that prediction played out in the financial results for the year.
“Much more significant was our productivity and profitability,” Gallagher said. “We were relentlessly focused on talent management and our strategic approach to the practices.”
To that end, the firm created two new roles in 2017: chief talent officer and chief lateral partner recruitment officer. Margaret Suender, a longtime staff member and former lawyer at Pepper Hamilton, is the chief talent officer, and Karen Anderson joined from Perkins Coie to take the recruiting role. Cole said the firm created those positions to “professionalize” the recruitment process.
The firm’s total head count decreased by 7.2 percent to 450 lawyers, and equity partner head count was down 8.3 percent, to 121. But Gallagher and Cole pointed to some key lateral hires.
Several of those hires were “boomerangs,” Cole noted—lawyers who previously worked at Pepper Hamilton and returned. Rachael Bushey, along with partner Jennifer Porter and an associate, rejoined Pepper Hamilton in November, after leaving the firm for Hogan Lovells a year-and-a-half earlier. Bushey’s 2016 departure with two other partners was seen as a major loss for Pepper Hamilton at the time.
And in September, Lisa Kabnick and Kathryn Pourmand Nordick rejoined Pepper Hamilton from Reed Smith, adding to the firm’s commercial department and financial services capabilities. Gallagher also noted financial services partner Scott Samlin and commercial litigator Peter Haveles as important 2017 partner hires.
In its health sciences department, in addition to Bushey and Porter, Pepper Hamilton hired Deborah Spranger from Saul Ewing Arnstein & Lehr, where she had led the business and finance and life sciences practices.
Spranger and Bushey both said they were attracted to Pepper Hamilton by changes in its approach to health care-related work. The firm’s health effects litigation practice suffered a decline in revenue in 2016, the firm said last year. But in March, it became part of a larger, 110-lawyer, multi-practice health sciences department.
While the firm did not provide a breakdown of year-to-year performance for the health sciences department’s practice groups, Cole said the department is “thriving.” The health effects litigation practice remains active, he said, continuing to represent clients like Eli Lilly and Co., GlaxoSmithKline, Medtronic and the National Football League.
Other practices that did well, Cole and Gallagher said, were transactional, commercial litigation, intellectual property and white-collar, both in health sciences and in other fields. Asked whether any practices were weak, they said none were inconsistent with budgeted expectations.
For 2018, Pepper Hamilton will continue to focus on talent acquisition, Gallagher said, noting that the firm is in the process of making additional lateral hires. Asked about the potential for mergers, he said there is nothing currently on the table, but the firm is open to good combination opportunities.
The firm still isn’t planning any major rate increases, Cole said, but alternative fee arrangements have become more prominent. He said the firm has become “proactive” about offering those options to clients.
“When a case is filed we say … here is our strategy, and that includes a budget,” he said. That budget includes tailored staffing details, Cole said, and is developed using pricing specialists.
Asked whether the firm expects to return to its size and gross revenue levels from before 2016, Gallagher said Pepper Hamilton is focused on 2018, rather than the past.
“The most important thing is delivering profitable work. We’re very pleased with revenue per lawyer, profits per lawyer,” he said.
Whether 2017 productivity levels are sustainable, given industrywide demand flatness, he said yes—with the right recruiting strategy.
“The focus on talent management is an important factor,” he said. “We expect that to continue.”