First Quarter 2010 Report

With 2009 — the most tumltuous year in the history of major law firms since the Great Depression — now a full quarter behind us, we are poised to assess the extent to which the myriad changes then implemented in the universe of BigLaw seem to have taken root, and prognosticate a bit as to what we are likely to see in the three quarters to come.

We begin this brief note by remembering Heller Ehrman, Thacher Proffitt, Thelen, Wolf Block and McKee Nelson as well as IP boutiques Morgan & Finnegan and Darby & Darby – all one-time venerable firms that saw their last days in this latest storm. But still, we are pleased to opine that by and large, the managers of our major firms did nothing short of remarkable work steering their respective ships through last year’s tsunami, and moreover that it seems that we are pulling further and further away towards increasingly calm waters with every passing day in 2010.

In a nutshell, the 2009 financial reports generally came back significantly better than experts anticipated. Leading the pack as it traditionally does was Cravath, whose 2009 numbers were up across the board: gross revenues by 7% (to $569m), profits per equity partner (PEP) by 8% (to $2.7m), overall headcount by 8% (to 477 lawyers), and number of equity partners by 2 (to 92)! (To put these numbers in some wider perspective, though, Cravath’s 2009 improvements come after a depressed 2008, when its gross revenue declined by 13% and its PEP plummetted by 24%, but also off all-time highs reached in 2007, revenue then peaking at $610.5m and PEP at $3.3m.) Weil Gotshal also saw its 2009 gross revenue increase (0.18% to $1.233m), thanks to a blockbuster year for its bankruptcy and restructuring practice (which firm executive partner Barry Wolf noted amounts to only “100 lawyers out of 1250”). Cahill Gordon proudly reported increases in gross revenue and profits as well, its gross revenue climbing over 9% (to $269.5m), revenue per lawyer about 6% (to $987,000); and PEP 19% (to $2.5m)! “Improvements in the capital markets starting around May of last year led to more activity on our corporate side,” co-administrative partner Jonathan Schaffzin modestly summarized. “We were pleased with how the year ended.” Jenner & Block, Kirkland & Ellis, Davis Polk, Sullivan & Cromwell, Cleary, Gibson Dunn, Hughes Hubbard and Bryan Cave were also reported to have enjoyed increases in both gross revenue and PEP from 2008 levels.

More representative of the tsunami of 2009 however were the firms reporting either gross revenue drops but PEP jumps as a result of strident restructuring measures, or declines in both categories. Milbank, for example, whose 2009 revenue declined by 3% (to $601.5m), number of lawyers by 8% and the firm’s partnership by 3.5%, saw its PEP increase by 5% (to $2.23m) and its revenue per lawyer by 5% (to $1.13m). Similarly, while Fried Frank reported a decline in revenue of 13%, its PEP and revenue per lawyer figures increased by 6% each (to $1.3m and $906,000 respectively), primarily as a result of the firm’s decision to cut its attorney workforce generally by 18% (to 469 lawyers firmwide) and its equity partnership by 14%. Firm chairman Valerie Ford Jacob summed up the year’s results with great optimism as follows: “It is the firm’s third most profitable year and we are on the right trajectory.” And while Dewey & LeBoeuf saw its gross revenue in 2009 fall by 11.3% (to $913.876m), its PEP in 2009 actually rose 3.4% (to $1.6m, with lawyer headcount falling from 1268 in 2008 to 1054 in 2009 — among those being 20 fewer equity partners). Other firms reporting decreases in revenue but increases in PEP were Paul Weiss, Sidley, Paul Hastings, and Cadwalader.

Howrey was among those firms whose 2009 numbers were down across the board, its gross revenue declining 16.3% (to $480m), revenue per lawyer 19.2% (to $702,782), and profits per partner 34.9% (to $846,053). “It was a tough year,” said Howrey chairman Robert Ruyak. “A lot of things changed, and we’ve had to make some changes to account for that.” For example, the firm paid nonequity partners $20 million less by cutting bonuses, and required each department to cut expense budgets by 5%. Ruyak also attributed the steep revenue decline in part to tardy client payments. “By December, we were behind by about a month,” he said. DLA Piper’s U.S. operations reported that in 2009 gross revenue declined by almost 14% (to just over a billion dollars), while revenue per lawyer and PEP fell by only about 5% primarily as a result of attorney layoffs (the headcount at DLA Piper U.S. declined by 89 associates (11.6%), 24 equity partners (10.1%), and 16 non-equity partners (4.3%), for a total loss of 129 lawyers (9.3%)). Nonetheless, firm Chairman Frank Burch declared: “We are bullish on 2010 based on the strong position of the firm as we enter the economic recovery and expect to continue making investments where we believe there is potential for growth. In short, we are very confident that 2010 will be a solid year for the firm.” White & Case’s 2009 revenue fell by 11% (to $1.3 billion compared with $1.46 billion in 2008), while its PEP, as a result of massive firmwide restructuring across the associate and partner ranks, remained virtually unchanged (at $1.595m). Debevoise reported that its gross revenue dropped 12% (to $667.9m) and its PEP 16% (to $1.87m). “Frankly we did see some of the slowdown this year,” acknowledged Martin Frederic Evans, Debevoise’s presiding partner. Debevoise’s numbers must be observed through a different lens, however, as — in keeping with its reputation for stability during downturns — it did not subject itself to significant restructuring to compensate for declining PEP. Similarly, at Quinn Emanuel, PEP declined 6% (still exceeding the $3 million mark!), while revenue dropped 5% (to $420m) — these numbers achieved without resorting to layoffs. Other firms which reported drops in both revenue and profits include Dickstein, O’Melveny, Mayer Brown, Sonnenschein and Dechert.

Beyond the financials, major firms remain focused on many fundamental issues that came to the forefront during the storm such as alternative fee structures, work-life balance, flex/part-time arrangements, diversity hiring and promotions, and cost-cutting measures such as staffing matters more thinly and reducing summer program and holiday party expenses. The extent to which changes for the better in these areas will take root still remains to seen but by and large, firms are clearly more healthy, efficient and competitive now than before the crisis.

In sum, the essence of our view of the condition and direction of BigLaw as of April 1, 2010 is: Stabilized and looking positive but with significant uncertainty.

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