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January 26, 2010 6:00 AM

THE AM LAW 100: How Badly Did Am Law Firms Really Fare Last Year?

Posted by Drew Combs

Many in the legal industry are eager to close the book on 2009. That isn’t surprising given that low demand for legal services and missed budget projections forced many firms to reassess partner pay packages, lay off attorneys and staffers, cut associate salaries, and delay start dates for law school graduates.

But there remains one final chapter to write before that book can officially be closed--and The Am Law Daily is in the process of writing that chapter with our posts on the financial performance of individual Am Law 100 and 200 firms in 2009.

We've already reported on profits and revenue figures for several firms, including Sonnenschein Nath & Rosenthal, where profits per partner dropped by 3 percent, and K&L Gates, where profits per partner rose by 1 percent.

In the weeks ahead, The Am Law Daily will be posting stories about the 2009 financial performance of dozens more firms as the information becomes available. Once that exercise is complete, we'll have a clearer picture of how hard the economic downturn has hit the industry's largest and most profitable firms.

"I think 2009 will be a mixed bag,” says Peter Zeughauser, a legal industry consultant, “You may see some firms that have had a really good year and some that are down materially, but for most firms profits will be up or down a few percentage points.”

Zeughauser says those outliers on the upside are likely to be firms with large practices that stayed busy during the downturn, such as financial services litigation, patent, bankruptcy and restructuring, and white-collar criminal defense.

A Hoffman Alvary & Co. survey of 36 Am Law firms released this month reported that 33 percent of responding firms described their earnings last year as approximately the same as 2008 plus or minus 2 percent. Twenty-eight percent of respondents experienced a decline in PPP of at least 2 percent, with 14 percent of firms seeing profits decline by more than 10 percent.

On the whole, 2009 felt a lot like 2008, which is when the industry truly began to feel the impact of the recession. In the end, the 2008 profit and revenue figures revealed that for the first time since 1991, both average profits per partner and revenue per lawyer dipped among Am Law 100 firms.

Among this group, revenue grew by 4.1 percent to $67 billion, but profits per partners and revenue per lawyer fell by 4.3 percent and 1.2 percent, respectively. While a similar big-picture analysis for 2009 won't be available until all the numbers are in, the headlines from the past year revealed an industry in turmoil.

Most of the attention went to the series of cost-cutting measures carried out across the industry, especially those that came in the form of layoffs. According to legal blog Law Shucks, 12,196 people (4,633 lawyers and 7,563 staff) at 138 law firms were laid off in the last year.

Many of these cuts came earlier in the year, but the latest report from the U.S. Bureau of Labor Statistics indicates that the legal services sector lost 2,100 jobs in December 2009--an indication that the job-shedding may not be over just yet. In total, the legal sector has lost 42,700 jobs since December 2008.

And over the past year, news about layoffs shared space with announcements about delayed start dates for recent law school graduates, downsized summer associate programs, and salary cuts for associates.

Dozens of Am Law 100/200 law firms--Nixon Peabody, Baker & McKenzie, and Greenberg Traurig among them-- announced salary cuts, which in many instances amounted to a $15,000 cut in base salary for first-year associates who had been earning $160,000 a year. The American Lawyer's annual survey of law firm managing partners, released in December, found that 40 percent of law firm leaders said they reduced associate starting salaries.

Some firms, including Reed Smith and Orrick Herrington & Sutcliffe, also used 2009 as an opportunity to completely rethink their associate promotion model, jettisoning the lockstep system in favor of so-called merit-based approaches to awarding promotions and raises. According to the managing partners' survey, 51 percent of law firm leaders said they were introducing a competency model to their decision-making process regarding associate pay.

Meanwhile, associates and staffers weren’t the only population targeted amid the cost-cutting wave last year. In November 2008, DLA Piper announced a plan to ask 275 nonequity partners to contribute capital in 2009, in an effort to reduce its credit exposure.

Some industry watchers described the move as a pay cut for those nonequity partners. If it was a pay cut, the DLA partners who took it had company at other Am Law 200 firms. Missed budget projections left partners at a number of firms looking at reduced annual compensation figures. In some instances, even Am Law 200 partners with guaranteed compensation packages were asked to accept cuts to their pay.

It isn't yet clear what the true impact of all these changes will be. Early signs from some Am Law 200 firms-- including Cadwalader, Wickersham & Taft, which recorded a 28 percent increase in profits per partner, and Morrison & Foerster, which announced a more modest 4 percent raise in PPP--suggest that despite the dire predictions, 2009 may turn out to have been a relatively stable year.

Of course, some managing partners and industry watchers say that if the industry dodged a bullet in 2009, it was the aggressive cost-cutting efforts that made that possible.

"No law firm was immune from the recession. Everyone was impacted," says Jason Yuen, a legal recruiter at Los Angeles-based Yuen Attorney Search. "But a lot of firms took the opportunity that came with the economic recession to not only cut costs but also get deals on office space, expand client relationships with alternative fee arrangements, and recruit new partners." He adds, "I think you will see the benefits of those moves in some firms' revenues and profits."

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it's sad; i was laid off exactly one year to the date -- i'm a legal secretary and have been for 15 years. Since the layoff, I haven't even received a call for an INTERVIEW...much less an actual job, i.e., contract, temp, or permanent...PRETTY DISMAL SITUATION!

teala - just remember you aren't alone.

at least we can all sleep soundly at night safe in the knowledge that our layoffs allowed the partners at my firm to maintain 1.6 m ppp per year, i mean if they had had to drop a couple 100k they might have really had to suffer. the thing is i wouldn't have minded being canned if it actually saved a company, but really i just saved a bunch of guys from being less rich. pretty weak.

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