Behind the Numbers
Vivia Chen
The American Lawyer
03-30-2007
They may lament that they are the poor cousins of hedge fund managers and private equity stakeholders, but law firm partners are hardly suffering.
In 2006, for the first time since The American Lawyer started measuring the financial performance of law firms 22 years ago, a majority of America’s 100 top-grossing firms had profits per equity partner of $1 million or more. And one, Washington, D.C.’s Wiley Rein, notched the highest profits per partner ever recorded by the magazine.
In fact, almost all indicators were on an upswing in 2006, according to just-released results from The Am Law 100, The American Lawyer’s annual survey of law firm finances. (Full results appear in the May issue of the magazine.)
Compared to 2005, average revenue per lawyer went up 7.3 percent (to $779,000, from $726,000), and average gross revenue shot up 11.4 percent (to $567 million, from $509 million). Lawyer head count also grew by 3.9 percent.
More Am Law 100 lawyers are making megabucks than ever before. Of the 59 firms in the $1 million–plus category, 15 had profits per partner of $2 million or more (in 2005, there were ten such firms). And in the $3 million–plus club, Wachtell, Lipton, Rosen & Katz—whose average profits per equity partner have exceeded $3 million since 2004—got some company: Cravath, Swaine & Moore ($3 million) and Wiley Rein ($4.4 million).
How did firms hit such sky-high profits per partner levels? Contingency fees helped fuel the incredible profit growth at Wiley Rein (which posted a 465 percent increase), as well as at Akin Gump Strauss Hauer & Feld (a 34.2 percent increase), Quinn Emanuel Urquhart Oliver & Hedges (a 27.6 percent increase), and Finnegan, Henderson, Farabow, Garrett & Dunner (a 21.8 percent increase).
There was also more work on everyone’s plate. Litigation, transactions (including private equity and hedge funds), and real estate were all very busy. “It was secular growth everywhere,” says Cravath presiding partner Evan Chesler. “It’s not attributable to any one factor; we were very busy in litigation and corporate.”
For some firms, reducing the size of the equity partnership helped spike per-partner profits. Of the 28 firms that posted profits per equity partner increases of 15 percent or more in 2006, 15 had a decrease in the number of equity partners. (Last year 17 Am Law 100 firms had more nonequity partners than equity partners.)
Paradoxically, some firms that increased their profits per partner and purged their partnerships somehow managed to end up with a net gain in number of equity partners anyway. One is Pillsbury Winthrop Shaw Pittman, which increased both profits per partner (up 14.4 percent) and the number of equity partners (up 38.3 percent). However, Pillsbury cut head count by 13 percent and the size of its total partnership, both equity and nonequity, by 10 percent.
Chairman James Rishwain, Jr., insists that the axed partners were not a major factor in the firm’s profitability gains. “Our increase in 2006 was not derived from partners leaving the firm,” he says, adding that Pillsbury has become “more nimble” and “more focused on key industries,” such as energy, technology, financial services, and real estate. His summary of 2006: “Our attorneys just worked harder.”
Being cruel to be kind also describes management choices at Chadbourne & Parke and Holland & Knight. Both firms sheared their partnership ranks by almost 10 percent before ending 2006 with big surges in profits per partner (Chadbourne’s went up by 12.4 percent; Holland & Knight’s by 14.8 percent) and equity partners (Chadbourne’s rose by 9.3 percent; Holland & Knight’s by 7.6 percent).
Chadbourne managing partner Charles O’Neill says that firing partners was a “hard decision” but that the firm, coming out of a disappointing 2005, “decided we need to do things differently [because] this is a business.” Getting rid of partners who didn’t perform up to snuff, O’Neill says, made room in the equity ranks for those most able to boost the firm’s profitability. That seems to be Holland & Knight’s strategy, too. The firm shrank its lawyer count by almost 13 percent and closed unprofitable offices. For the 35 percent of Holland’s partnership with equity, profits per partner topped $700,000 in 2006—an increase of almost $100,000 from the year before.
The bottom line: It’s a great time to be a an equity partner at an Am Law 100 firm. But getting there—and staying there—can be brutal.
E-mail: vchen@alm.com
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