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May 12, 2010 6:00 AM

THE AM LAW 100 2010: Too Big to Fail?

Posted by Ed Shanahan

AL100Logo-128By Julie Triedman

Carrying dozens of offices through the worst recession in a generation might sound like a prescription for disaster. But heads of The Am Law 100's most geographically diverse firms say that their business model is not only alive, but robust.

A cursory look at the numbers suggests that the recession hit these megafirms especially hard. Two-thirds of the 15 Am Law 100 firms with the most offices showed year-over-year declines in revenue per lawyer and compensation–all partners, two of the best indicators of a firm's financial health, compared to a little more than half of the rest of the Am Law 100 firms.

Nonetheless, megafirm leaders say that their business model's payoff--both as a hedge against a downturn in a single region or practice area and as a way to increase market share--still outweighs the extra overhead it requires, even during a recession. In fact, heads of several megafirms say they have doubled down on their commitment to both geographic and practice area diversity.

The downturn hasn't slowed down globalization, notes Peter Kalis, chairman of K&L Gates, which was nearly alone in posting revenue and profit gains in both 2008 and 2009. During that time, K&L Gates folded in three smaller firms, absorbed about 100 additional laterals, and opened several offices, including three--Moscow, Warsaw, and Tokyo--in the past five months alone. "Other firms felt a great need to hunker down," says Kalis. "We saw [the recession] as an opportunity."

Others agreed. "Some people would suggest that having offices in various countries could be more of a challenge in a recession," says Robert Dell, chair and managing partner of Latham & Watkins. "We actually found the opposite." The firm opened two new offices in the past several months, bringing its total to 26; meanwhile, revenue per lawyer and compensation–all partners surged (by 6 percent and 4 percent, respectively), even though gross revenue dropped by 5 percent.

On the other hand, Morgan, Lewis & Bockius likewise chose aggressive growth--but saw its compensation–all partners plunge 12 percent, to $920,000. The firm brought on 50 lateral partners, about double the number in previous years, to fill holes in its life sciences and energy practices. "We decided we'd rather invest and take our hit last year, and have [the new partners] in the future," says Morgan Lewis managing partner Thomas Sharbaugh.

There were large disparities in results among the biggest-footprint group in 2009. Among the largest decliners in revenue per lawyer were Jones Day (down 6.1 percent), DLA Piper US (down 5.3 percent), and Hogan & Hartson (down 7.8 percent). Gainers included Cozen O'Connor (up 10.6 percent), Dewey & LeBoeuf (up 6.7 percent), and Latham (up 6 percent).

At Dewey and Latham, the gains in revenue per lawyer were mostly attributable to head count reductions--16.9 percent at Dewey and 10.6 percent at Latham. That, consultants say, can cause an artificial short-term boost in revenue per lawyer because of "run-off"--billed work by departed lawyers that was collected after they left.

When it works the way it's intended, geographic diversity can act as a hedge against hard times. Dell notes that Latham's three offices in Germany didn't feel the recession until six months after it hit the United States, Asia, and the rest of Europe. Then, about the time the work picked up in Asia, Germany slowed down. Latham, like most of the megafirms, had broad diversity in practice areas, and some of its major specializations appeared to be insulated. For example, Dell says that "having multiple offices was just great for us in international cartel cases."

In other instances, geographic spread can be a drag on profits. Reed Smith's largest office is in London, and the decline of the British pound in 2009 pulled the firm's revenue per lawyer, which was flat, down by 2 or 3 percent, says global managing partner Gregory Jordan. "We definitely slowed down our strategic expansion [last year]," he says. "But we continue to believe strongly in the need for global positioning."

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