Pace Slowing But Profits Up Again At Big Law Firms
By AMANDA BRONSTAD
The top partners at Los Angeles’ three largest law firms took home more than $1 million in 2002, considered the big leagues in legal circles, and many of the biggest firms boosted profits-per-partner levels even as the broader economy remained mired.
The gains seen by L.A.’s biggest law firms mimicked the generally strong performance of large firms nationwide. Some of the increases resulted from strong litigation and bankruptcy practices as well as such cost cutting measures as renegotiating leases, cutting associate pay and converting partners from equity to non-equity status.
Profits taken by equity partners at Gibson Dunn & Crutcher LLP jumped to $1.18 million during 2002, a 7.2 percent increase over the year earlier. Equity partners at Latham & Watkins brought home $1.14 million in 2002, an 8.6 percent increase, while equity partners at L.A.’s largest firm, O’Melveny & Myers LLP, joined the $1 million club for the first time, pulling in an estimated $1.03 million, up 10 percent.
Revenues at six of L.A.’s seven largest law firms totaled nearly $2.5 billion, up 13 percent from 2001. (Paul Hastings Janofsky & Walker LLP, the sixth largest, had not completed compiling its year-end financials by late last week.)
The increases, however, mark a falloff from the rate of growth in both profits and revenues in each of the two previous years and are blamed largely on sluggish economic activity.
“There’s no question that 2002 was a very difficult year for the capital markets practice, mergers and acquisitions, and corporate finance,” said Martha Jordan, managing partner of the L.A. office of Latham & Watkins. “But I think we’ve got a very strong practice across a lot of different areas. We weathered the storm fairly well.”
Pressure to maintain lofty profit levels at a time of increased corporate retrenching and economic malaise will be felt through 2003, said Edward Poll, a legal consultant with LawBiz Management Co. in Venice, and some firms may buckle under the pressure.
Firms weighted toward certain practices, especially tech heavy Brobeck Phleger & Harrison LLP, which will dissolve this month, could find 2003 a pivotal year, with real management challenges looming if the economy continues to sputter.
“There are only a few firms that are managed well, despite their size,” he said. “As the economy shakes out, we’ll see what happens.”
Jordan said Latham made “aggressive cost-cutting” measures, including eliminating the firm’s annual business retreat. Also, there was greater reliance on certain practices, such as litigation, to bring in business.
Overall, the percentage by which law firms increased both profits and revenues was less than the increases seen in 2001.
“Before Sept. 11, the economy was moving right along and nobody felt much pain,” Poll said. Last year, he added, “people were much more reticent to do a lot of the deals they did before. Mergers and acquisitions, and other deals, are down.”
O’Melveny, making its debut among firms attaining $1 million in profits per partner, had some help when it acquired boutique firm O’Sullivan LLP in September, adding 90 attorneys to its New York office.
“We’re gratified by that result in light of last year’s economy,” said Bruce Boulware, chief operating officer of O’Melveny. “Last year was a year of strategic positioning, a building and growth year.”
Still, O’Melveny’s 10 percent increase in profits paled in comparison to the 33 percent increase in profits per partner it logged in 2001, an increase also attributed to significant structural changes within the firm.
Even Gibson’s profit increase of 7.2 percent was about half the increase in 2001.
Revenue increases at L.A.’s largest law firms also were more modest. Gibson’s revenues for 2002, for example, rose 5.9 percent to $569 million, less than half the increase of 2001. Latham’s revenues jumped 17 percent to $906 million, compared with a 20 percent increase in 2001. Also, O’Melveny expects to reach $560 million in revenue for 2002, up by 14.2 percent but less than the 22 percent increase it generated in 2001.
The big L.A. firms reported adding partners during 2002, although at a slower pace than in years past.
Gibson Dunn & Crutcher, which has named eight new partners for 2003, named nine last year and 12 in 2001. Paul Hastings named seven partners for 2003, one more than in 2002 but two less than 2001.
Smaller firms, bigger gains
Bucking the trend in L.A. were mid-sized firms. Irell & Manella LLP’s profits soared 25 percent over 2001’s levels, to $887,000 per partner, far exceeding its larger counterparts. The second largest increase in profits was at Manatt Phelps & Phillips LLP, which saw profits per partner rise 15 percent, to $704,000.
Sheppard Mullin Richter & Hampton LLP, which just added several big-ticket entertainment attorneys to its partner roster, saw profits jump 10 percent, to $581,700, compared with to an increase of 8.2 percent in 2001.
The three firms have between 200 and 300 attorneys each.
Poll said mid-sized firms did better in 2002 because they have a smaller partner-to-associate ratio and are big enough to raise rates to competitive levels.
Morgan Chu, co-managing partner at Irell, said the firm has added partners slowly, but attributed the profit increase to “sticking to the basics.” He also said the firm reduced costs and generated higher fees and billing rates.
“We didn’t do what a lot of other firms have done, which is to move equity partners to being non-equity partners,” Chu said. “We have one class of partners at the firm and no fancy accounting tricks.”