Am Law 200 - 2012

[Pages:33]The 2012 Am Law 200

The Second Hundred chalked up a healthy increase in revenue per lawyer in 2011, but costs kept gains in profits small.

The American Lawyer

May 30, 2012

In a year when The Am Law 100 posted tepid year-over-year financial gains, Second Hundred firms bested their bigger rivals on most counts but still fell short on the bottom line. The Second Hundred's revenue per lawyer rose 5.3 percent and value per lawyer rose 4.7 percent, but profits per partner rose just 2.2 percent, less than The Am Law 100's 3 percent. The Second Hundred's total gross revenue in 2011 was $17.93 billion, a 2.7 percent gain outpaced by The Am Law 100's 5.3 percent gain. And while the two groups had comparable profit margins, the Second Hundred had less success turning top-line growth into profits. The culprits? Steep expenses and a sharp drop in leverage.

THE FEATURES

Expense Report

The Second Hundred chalked up a healthy increase in revenue per lawyer in 2011, but costs kept gains in profits small.

By Claire Zillman

The American Lawyer

May 30, 2012

Illustration by Matthew Hollister

They were casualties of the high cost of doing business: In a year when The Am Law 100 posted tepid year-over-year financial gains, Second Hundred firms bested their bigger rivals in most metrics but still came up short on the bottom line. While the Second Hundred's revenue per lawyer jumped 5.3 percent and value per lawyer rose 4.7 percent, profits per partner increased just 2.2 percent, a bit less than The Am Law 100's 3.0 percent. The culprits? Steep expenses and a sharp drop in leverage.

The Second Hundred's total gross revenue in 2011 was $17.93 billion, a 2.7 percent increase that was outpaced by The Am Law 100's increase of 5.3 percent. Each group had roughly equivalent profit margins (37 percent for the Second Hundred and 38 percent for The Am Law 100, both unchanged from 2010). But the Second Hundred was much less adept than its bigger counterparts at translating top-line growth into profits: While The Am Law 100's growth in profits per partner (3.0 percent) exceeded its growth in revenue per lawyer (1.9 percent), the converse was true for the Second Hundred, where average profits per partner grew 2.2 percent, and average revenue per lawyer increased 5.3 percent.

Leverage was a big part of the explanation for the disparity. The Am Law 100 expanded its ranks in 2011, recording a 3.3 percent increase in overall head count, a 1.4 percent increase in equity partners, and a 5.7 percent rise in nonequity partners. At the Second Hundred, though, head count fell 2.5 percent, with most of the shrinkage occurring in nonpartner ranks, traditionally the sweet spot of law firm profitability. (The total number of equity partners at Second Hundred firms fell by just 0.7 percent.) The result was that average leverage at Second Hundred firms fell to 2.04 from 2.10, while Am Law 100 leverage grew to 3.49 from 3.4.

"Firms in the Second Hundred have not been aggressive in hiring associates; they've been restrained in terms of recruiting," says Mark Hinderks, managing partner of Stinson Morrison Hecker, number 166 on The Am Law 200. His firm used to hire new associate classes of 15 or 20. The past few years it's hired groups of seven or eight. "We may be up around 10 or 11 this fall, but it's still not where it used to be," he says.

The Second Hundred's decline in leverage has nudged the average seniority at firms up a bit. That has shifted more work upward, says Hinderks. Partners are doing work that might normally go to associates. The work gets done, but at a higher cost. Clients are also indirectly promoting lower leverage by requesting that only senior lawyers handle their matters, says David Antzis, managing partner of Philadelphia's Saul Ewing, where leverage dropped to 1.64 from 1.75. "They say, 'Your rate may be twice an associate's, but you'll do it twice as fast.' " (In our most recent law firm leaders survey ["Building a Breakout Firm," December 2011], 54 percent of respondents said they have had clients who refuse to pay for work by first- or second-year associates.) "There are some types of legal work where the best value is attained by having a first-year associate do that work, but more and more clients are doing that work in-house or having that work done in other ways that they consider a good value," says Emily Parker, managing partner of Dallas's Thompson & Knight, where leverage dipped to 2.27 in 2011 from 2.55.

Expense Report

May 30, 2012 Second Hundred firms traditionally have lower leverage than Am Law 100 firms. The bigger firms need more associates because they handle huge deals and litigations that require armies of associates for document review, says Antzis. "In the Second Hundred, your deals and litigation just aren't as big, so you don't need lots of junior lawyers," he says. Nonetheless, Second Hundred firms felt some of the same pressure to raise associate salaries and bonuses, which had been stagnant during the recession, that Am Law 100 firms did. "We kept our associate salaries kind of low for a few years, but raised associate starting salary this year," Antzis says. "There was pent-up demand [for compensation increases] from 2008, when firms weren't increasing salaries," he says, "but now the market is getting better and firms are responding."

The same was true at Stinson Morrison, says managing partner Hinderks. "We were more cautious about raises and bonuses in 2009 and 2010," he says. But in 2011, as the economy steadied, his firm awarded nonpartners at his firm larger bonuses, he says. And even though there were fewer associates receiving these raises and bonuses, on average, the increases still ate into profits.

In other areas, such as back-office costs, expenses rose in 2011 because 2010's frugality simply couldn't be sustained. After drastically cutting expenses in 2010, which produced a 3.4 percent increase in profits across the Second Hundred, firms found that there were few steps to be taken to further reduce expenses. As the economy recovered, some let their cost-savings initiatives expire. Stinson Morrison, for instance, saw an 8.2 percent bump in profits in 2010, which Hinderks attributes to a series of measures. "We'd battened down the hatches in 2010 and saw a onetime expense savings of about $7 million. None of that was repeated in 2011," he says. Parker, of Thompson & Knight, saw her firm's profits jump 11.1 percent, to $950,00 in 2010. This year they sank 2.6 percent. "If you look across the two years, 2010 and 2011, our PPP was slightly down, but that's in comparison to a very dramatic increase in 2010," she notes.

Despite the decline in leverage, Second Hundred firms continued to pick up lawyers from Am Law 100 firms, a trend that we noted a year ago ["A Rebuilding Year," June 2011]. One of the most aggressive was Ogletree, Deakins, Nash, Smoak & Stewart, a labor and employment shop with 41 offices across the country. The firm, which posted a 17.9 percent gain in gross revenue in 2011, had a net gain of 69 lawyers, a 14.6 increase. "We added a significant number of partners in general practice who'd been priced out of their firms," says managing shareholder Kim Ebert. (Ogletree's revenue per lawyer increased 3.1 percent, to $495,000, and its profits per partner rose 8.6 percent, to $505,000.)

Saul Ewing's Antzis, whose firm opened a Boston office in June 2011, noted the same trend in its hiring. (Saul Ewing's equity partner head count grew by 3.8 percent in 2011.) "Lawyers in really big firms are very disenchanted by rate pressure," he says. "Lots of lawyers don't have practices that can support $700-plus rates. Partners are gravitating toward smaller firms where they can receive some rate relief. It's an enormous recruitment opportunity for us."

Facebook's Friend

How Fenwick & West landed the world's most high-profile IPO.

By Ross Todd

The American Lawyer

May 30, 2012

Photo by Annie Tritt

It's the assignment that got away that has done as much to shape Fenwick & West as any other. Fenwick lawyers incorporated Steve Jobs and Steve Wozniak's Apple Computer Inc. in 1976, after a partner's sister referred the pair to the small Silicon Valley firm. But four years later, when Apple wanted to go public, the company took its IPO work to Fenwick's then?building mates at Wilson Sonsini Goodrich & Rosati. Fenwick chair Gordon "Gordy" Davidson says the trauma of missing out on the Apple IPO was part of what triggered his transition from litigator to corporate dealmaker.

Given that "Gordy" and "Fenwick & West" have largely become synonymous terms in the deal culture of Silicon Valley, that was a significant switch. Since losing out on the Apple offering, Davidson and Fenwick have helped launch the IPOs of Silicon Valley tech stalwarts including eBay Inc., Electronic Arts Inc., Intuit Inc., Oracle Corporation, and Symantec Corporation.

Still, none of those assignments matches the firm's latest coup--landing Facebook Inc.'s IPO--in terms of size and exposure. Facebook documents drive so much traffic to the Securities and Exchange Commission's Web site that the agency has asked the firm for a heads-up before any Facebook filings are made. Client and Intuit cofounder Scott Cook calls Facebook's IPO "bigger than the World Series" for the tech world.

Landing the Facebook IPO is a payoff for a strategic decision that the firm made when it was founded in Palo Alto 40 years ago: wooing and servicing tech clients. It's not all that different from the approach of Fenwick's peer firms such as Cooley and Wilson Sonsini. But unlike those firms, which have expanded nationally and internationally, Fenwick has hunkered down in the tech corridor with just three main offices in Mountain View, California; San Francisco; and Seattle, and two small outposts in Boise and Williston, Vermont.

Three of Fenwick's four practice groups--litigation, intellectual property, and corporate--focus almost exclusively on tech and life sciences companies and the banks and venture funds that bankroll them. (The firm's tax practice is the exception. About 80 percent of that work comes from tax planning and international transactions for some 100 Fortune 500 companies.)

The tech focus is particularly evident in Fenwick's intellectual property group. The lawyers provide patent and soft IP prosecution work that some firms eschew as less profitable. They also lend transactional support to companies where intellectual property is central to the business, and to start-ups where IP can essentially be the entire business.

Fenwick's entrepreneurial clients have also affected the firm's own business practices. Cisco Systems Inc. general counsel Mark Chandler and former Sun Microsystems Inc. GC Michael Dillon convinced the firm to embrace fixed and alternative fees for deal work early in the past decade, before such arrangements were an industry norm. More than 20 percent of Fenwick's work today is done under nonhourly billing arrangements, including the firm's fixed-fee patent prosecution work for Facebook.

Managing partner Kathryn Fritz, an IP litigator in Fenwick's San Francisco office, describes the firm's culture as "very slow on policy implementation [but] early on people just doing things." (She points to IP and litigation partner Stuart Meyer, who has telecommuted from Vermont since the 1990s and who actually made partner under the arrangement. The firm now has a small group of technical staff in Vermont that handle administrative work on patents and licensing matters at about two-thirds of the cost to do the same work in California.)

Fenwick has grown to 278 lawyers organically and through lateral acquisitions that were made without guaranteeing partner compensation. (All head count totals are full-time equivalent as of May.) A weekly e-mail to the firm's 95 partners details which clients have paid their outstanding bills that week. And profits are paid out at the end of every month, so partners feel the ebb and flow of the business cycle.

This fiscal approach has put Fenwick on a solid if not spectacular financial footing. The firm's revenue per lawyer of $925,000 ranks among the top 50 in The Am Law 200 and compares well with those of its tech-focused rivals at Cooley and Wilson Sonsini-- $920,000 and $930,000, respectively. However, profits per partner for fiscal year 2011 came in at $1.155 million, still lagging behind Cooley's PPP of $1.4 million and Wilson Sonsini's $1.8 million. (Fenwick has a small nonequity tier--just 11 of its partners--while nonequity tiers account for more than 25 percent of partners at Fenwick's Am Law 100 neighbors. That difference explains much of the profit gap.) Says Fenwick CFO Scott Pine: "From the purely economic side, we want to have something that's competitive with the top national firms, but that doesn't mean we have to be 20 percent higher than everybody in the market."

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