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April 29, 2010 8:58 AM

Lessons of The Am Law 100

Posted by Ed Shanahan

It could have been worse. That's the best that can be said for the performance last year of The Am Law 100, the top-grossing law firms in the nation. Three of the four key categories we've measured for 25 years--gross revenue, head count, and revenue per lawyer--fell, while profits per equity partner (PPP) barely increased by 0.3 percent, or $3,463, to $1.26 million.

But on average, even the bad results weren't nearly as dire as many firms had feared just a year ago. Overall, gross revenue was off by 3.4 percent, and head count dropped by about 1 percent. The firms earned a total of $64.8 billion, down roughly $2.3 billion. And, in the first year-over-year reduction in head count since 1993, they cut their lawyer labor force by 1,219, to 80,772. For all the heated attention to layoffs, about half the firms actually increased their size last year. RPL, which we regard as the most telling economic indicator, was down $15,697, to $802,381, a 2 percent fall. This was the second consecutive year in which RPL fell, another sign of the toll of the weak economy.

There were at least two reasons why the average partner profits eked out a small gain. Firms aggressively reduced expenses in 2009. And, the number of equity partners in The Am Law 100 dropped. There were 139 fewer of them, down 0.73 percent, to a total of 18,808. By contrast, the number of nonequity partners increased by 640; collectively they now constitute a record 37.9 percent of all Am Law 100 partners.

The averages mask two important developments:

The segmentation of The Am Law 100 continues. The 23 firms headquartered in New York, on average, outperformed the rest of the pack. And, of that group, the 13 firms with PPP of $2 million or more did better still, with a 3 percent gain in per-partner profits. In this group, there wasn't any growth in equity partners.

Is there life in the old business model?  Last year was the first in memory in which firms couldn't automatically increase their rates and make them stick. Now there are signs that client demand is picking up. For all the talk about the broken law firm model, leverage remains a very lucrative 3.29 lawyers for every equity partner. To put that more starkly, for the 50 biggest firms leverage hasn't disappeared, it's doubled since 1984. So, will firms wait for the supply-demand curve to work its magic? Or will they gauge that a reset has taken place--that clients, having flexed their buying power and liked it, will not readily return to their old ways?

Click here for the complete report, including all charts and feature stories.

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