2018-Am-Law-100-Insi

The Am Law 100’s Hard‐Won Profitability Growth and the Changed Dynamics of Competition Insights for Partners From a Decade of Upheaval

Hugh A. Simons and Nicholas Bruch May 8, 2018

1 Hello my name is

Nicholas Bruch [email protected] @NicholasBruch

Hugh A. Simons [email protected] @SimonsHugh Preview: Today’s storyline

Review of the past decade reveals stark changes in how law firms must manage themselves to improve profitability significantly and sustainably.

1. As firms realized the economy wasn’t going to bail them out, most turned to “management”—actively managing partner capacity, leverage, and costs—to get back to rising profitability.

2. “Management” has proven so effective it has undermined long‐held tenets of strategy: • The market is no longer consolidating—a firm doesn’t have to bulk up so as not to be on the wrong side of consolidation. • The market isn’t bifurcating by size or profitability— there are no such fault line firms need to be on one side of. • Mergers aren’t creating advantage: merged firms are under‐performing their peers. • Building out global footprints is weakening, not strengthening, domestic positions.

3 Takeaways for partners

1. Help leaders to not do stupid stuff.

2. Let leaders manage • Particularly: let leaders manage numbers of equity partners and leverage. • Also: encouraging delegation (i.e. leverage in action); controlling costs, etc.

4 1. Don’t do stupid stuff. Go after lightly‐differentiated work with low leverage. Have the range of partner comp be narrower than the range of economics of individual partners’ practices. Grow by planting flags around the globe. Hire laterals without talking to their past clients and colleagues. Pursue a “catch a falling knife” acquisition. Emphasize tenure over contribution in the partner comp system. Play in segments where you’ve no right to think you can win. Forsake after‐action reviews on laterals, etc. because they risk embarrassment. Pull your punches on providing feedback to peers and leaders. Hire laterally a partner group in an unrelated practice. Open an office through lateral hires and not transfer a senior, home‐grown partner Give compensation guarantees. Fail to constrain leaders’ flights of grandiosity. Leave unfunded partner pension schemes uncapped. 5 2. Let leaders manage

Today Suggestion

“Parallel “Command play” Managerial intensity and control”

Leaders Partners

6 Roadmap:

1. The Am Law 100’s hard‐won profit growth

2. Consolidation, bifurcation, and mergers

3. Strategies that are working (and not)

4. Implications for partners

7 The Great Recession arrived with a bang 2000 2007 2017 peak peak near peak? 15% Change The “Great Recession” from year begins earlier, Revenues real % 10% PPP

0% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Revenues fell for the first time.

‐5%

PPP fell an unprecedented 8 percent (real) in one year.

‐10% Year

Notes: All quantities inflation adjusted; Am Law 100 on varying firm basis. 8 Revenue growth as a multiple of economic growth ended

Prior to 2007, law firm revenue growth was an …but post‐2009 the exaggeration exaggeration of GDP year‐to‐year variations… (beta) has disappeared. 14% 14% Change from Am Law 100 prior year, Revenue Growth real % 12% 12%

10% 10%

8% 8% U.S. GDP Growth 6% 6%

4% 4%

2% 2%

0% 0% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

‐2% ‐2%

‐4% ‐4% Notes: All quantities inflation adjusted; Am Law 100 on varying firm basis. 9 2017: Revenues 20% below where the economy suggests 2017 near 2000 peak 2007 peak peak $120 Am Law 100 Revenues projected from revenues, economic model: inflation‐ Am Law 100 $100 20percent adjusted Revenues $B (actual)

$80

$60

$40 Economic model fitted period: 1994 to 2007 $20

$0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Note: Model of form log(Revenue) = m*log(GDP) + b, all quantities inflation adjusted. Results: R‐squared = 0.99; m=2.78, b=‐6.74. Varying firm definition of Am Law 100 10 We do know where the business went It’s disruption—not by technology, but by in‐house lawyers

Is your firm losing any business to other providers of legal services? (Percent responding “taking work from us now”) Law department in‐sourcing

Client use of technology

Non‐law firm providers

Non‐traditional law firms

Networks of independent lawyers

0% 15% 30% 45% 60% 75% 90%

Source: 2017 Law Firms in Transition, An Altman Weil Flash Survey 11 Confirmation: In‐house counsel are displacing Am Law 100 lawyers

25 Percent of private sector In‐house lawyers in 20 U.S. (%) 15 Am Law 100

5 2000 2007 2016 Year (business cycle peak)

Data source: ALM Intelligence, AmLaw and NLJ annual rankings; U.S. Bureau of Labor Statistics. Source: The Rise (and Fall?) of In‐house Counsel, by Hugh A. Simons and Gina Passarella, The American Lawyer, pp 65‐70, March 2018. 12 Despite the revenue weakness firms kept adding lawyers

130 Index (2007=100, inflation adjusted) Revenue growth 120 stalled… …no. of lawyers continued to grow.

110

100

90 07 08 09 10 11 12 13 14 15 16 17

Note: Data are totals for 2017 Am Law 100 firms in each year shown (i.e. constant firm definition of Am Law 100) and are adjusted for inflation. 13 Brief aside Particular locus of lawyer growth: Non‐equity partners

160 Index (2007=100)

Non‐equity 140 partners

120 Associates

Equity partners 100

Am Law 100 quantities 80 07 08 09 10 11 12 13 14 15 16 17

Note: Am Law 100 based on 2017 constant firm definition; associates comprise all non‐partner lawyers. 14 Brief aside Non‐equity partner growth not universally applauded

“It’s a cheap fix” “Gerrymandering while Rome burns!” “It’s manufacturing profitability” “It’s not fair to the non‐equity partners”

“A tactical fix to a “It’s fake profitability!” structural problem”

15 Brief aside Hypothesis testing: Fake profitability

What “Fake Profitability” might look like: What the Am Law 100 looks like: 60 60

50 50

Associates Associates 40 40

30 30

20 Equity 20 Equity partners partners 10 Non‐equity 10 Non‐equity partners partners

0 0 2007 2017 2007 2017

Notes: Associates data include all non‐partner lawyers. Data shown are on a constant firm basis, comprising the 93 firms from the 2017 Am Law 100 for which data are available for 2000 and 2017. 16 Brief aside Am Law 100’s evolving pyramid structure Leverage ratios at last three market peaks(1)

2000 2007 2017

Equity 1.0 1.0 1.0 partners

Non‐equity partners per equity 0.25 0.5 0.7 partner

Associates per equity 2.2 2.6 2.9 partners

01234 01234 01234 Leverage: 2.45 3.1 3.6

Notes: Associates data include all non‐partner lawyers. Data shown are on a constant firm basis, comprising the 93 firms from the 2017 Am Law 100 for which data are available for 2000 and 2017. (1) While market has not yet turned, 2017 is probably approaching another peak. 17 Brief aside Non‐equity partner growth: Alternative view

Nothing sacrosanct about the 2007 ratio.

Leverage had been evolving and will continue to evolve.

Non‐equity Higher leverage is a critical part of industry restructuring. partner growth (explicitly or de‐ Non‐equity partner growth helps with perennial problem facto) a sensible to too few senior associates and positive development. Goal for leverage: • Is not: preserve historical norms. • Is: operate with the right delegation; have partners at the right compensation.

18 Despite revenue weakness firms kept adding lawyers so that revenue per lawyer (RPL) fell sharply

130 Index …no. of lawyers (2007=100, Even in 2017, inflation continued to grow… revenue per adjusted) lawyer is 4‐ 120 Revenue growth stalled… percent below its 2007 level 110 (inflation …leading revenue per adjusted) lawyer to contract 4 percent 100 below 2007 level

90 07 08 09 10 11 12 13 14 15 16 17

Note: Data are totals for 2017 Am Law 100 firms in each year shown (i.e. constant firm definition of Am Law 100) and are adjusted for inflation. 19 And yet, PPP has more than recovered

2000 2007 2017 peak peak near peak? PPP, $2.0 inflation‐ adjusted $M +16%

$1.5 2007 level

Average PPP 7 years to surpass 2007 peak of Am Law 100 2 percent annual growth rate

$1.0 2000 level In 2017, PPP was 16‐ 2 years to surpass 2000 peak 7 percent annual growth rate percent above its 2007 level (inflation $0.5 adjusted)

$0.0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Year

Notes: All quantities inflation adjusted; Am Law 100 on varying firm basis. 20 How can this be?

Revenue per lawyer: Profit per eq. partner (PPP): • Down 4 % from ‘07 • Up 16 % from ‘07

21 How can this be?

Cost per lawyer

Profit per lawyer Subtract

Revenue per lawyer: Divide Profit per eq. partner (PPP): • Down 4 % from ‘07 • Up 16 % from ‘07

Lawyers per equity partner(1)

(1) Lawyers per equity partner is equivalent to 1 + equity partner leverage. 22 PPP drivers in context

Stage IStage II Stage III Stage IStage II Stage III Stage IStage II Stage III 120 120 120 Index to 2007, real 110 110 110 Profit per equity partner (PPP) Equity partner leverage Margin per 100 100 100 lawyer Rev per lawyer

Cost per lawyer 90 90 90

80 80 80 07 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17

Note: Am Law 100 is 2017 constant firm definition; associates comprise all non‐partner lawyers; dollar amounts are inflation adjusted to 2017 dollars. 23 Am Law 100’s managed return to profitability growth

Firms could not …but they did manage …thereby ‘managing’ grow revenues… costs and leverage… their way to higher PPP Cost per lawyer

Profit per lawyer Subtract

Revenue per lawyer: Divide Profit per eq. partner (PPP): • Down 4 % from ‘07 • Up 16 % from ‘07

Lawyers per equity partner(1)

(1) Lawyers per equity partner is equivalent to 1 + equity partner leverage. 24 Roadmap:

1. The Am Law 100’s hard‐won recovery

2. Consolidation, bifurcation, and mergers

3. Strategies that are working (and not)

4. Implications for partners

25 Source: Authors’ synthesis of myriad legal industry media pieces. 26 Conventional wisdom

Mechanism: Strategy implication: The market is Large firms are getting larger by Firms must bulk up. consolidating taking share from smaller firms. • Or see their revenues erode as they lose out to larger rivals.

The market is Firms are increasingly separating Position is destiny. bifurcating into the haves and have‐nots. The • Firms should move quickly to get strong get further ahead. on the right side of the bifurcation fault line.

Mergers A quick way to increase scale …and hence grow profitability faster significantly... than the market.

27 Consolidation

28 What market consolidation looks like …and not Scenario B Sales by American Widget Scenario A This Year: This Year: This Year: Manufacturers (Am Widg 100) Last Year This Year U.S. Germany WW Company A 10 12 10 5 15 Company B 10 12 10 0 10 Company C 10 11 10 0 10 “Top three” combined 30 35 30 5 35

Lots of other companies 70 65 70 0 70 Market total 100 100 100 5 105

Market share of “Top Three” 30% 35% 30% 33% ?? = 35/105 “Consolidation”

“No change in market share; one firm grew overseas”

29 What the Am Law 200 looks like

Share of WW Revenues Share of WW Lawyers Share of U.S. lawyers

Change Change Change 60% 60% 60% 61% +10pts Am Law 50 Am Law 50 53% +10pts 51% Am Law 50

43% 40% 40% 40% 43% +2pts 40% +8pts 41% Am Law 25 Am Law 25 37% +10pts 32% Am Law 25

27% 26% +2pts 24% 20% Am Law 10 22% +5pts 20% Am Law 10 20% 21% +8pts 17% Am Law 10 13% 13% +2pts 11%

0% 0% 0% 99 04 09 14 1799 04 09 14 1799 04 09 14 17

Source: The Consolidation Myth by Hugh A. Simons and Nicholas Bruch, The American Lawyer magazine, June 2018 [forthcoming]. 2000‐2007: 2007 to 2017: Consolidation Fragmentation Share of U.S. Lawyers

Groupings: 2000 Change 2007 Change 2017 Am Law 10 10.6 % +2.5pts. 13.1 % ‐0.2 pts. 12.9%

Am Law 25 24.2 % +2.2pts. 26.4 % ‐0.6 pts. 25.7%

Am Law 50 41.2 % +4.5pts. 45.7 % ‐3.0 pts. 42.7%

Source: The Consolidation Myth by Hugh A. Simons and Nicholas Bruch, The American Lawyer magazine, June 2018 [forthcoming]. 31 Pushback

But what about all Most are tiny firms. those mergers? Really large mergers sometimes implode. One merger partner is typically in decline pre‐merger. The rest of the market grows.

But international No, not according to the data. presence enhances U.S. If so, firms growing internationally would be gaining share competitiveness? domestically.

But all markets No they don’t. consolidate; law must Consolidation driven by competition based on cost and hence too! on economies of scale. When competition based on segment focus or differentiation, consolidation does not happen.

Source: The Consolidation Myth by Hugh A. Simons and Nicholas Bruch, The American Lawyer magazine, June 2018 [forthcoming]. 32 BIFURCATION

33 What bifurcation looks like

175 2017 PPP Dots Groupings are of indexed to denote firms by revenues Red line connects the 2007 individual average of the 25 firms in (inflation firms each revenue grouping adjusted) 150

125 Am Law 100 Avg.

Zero growth 100

75 Am Law 1 ‐ 25 Am Law 26 ‐ 50 Am Law 51 ‐ 75 Am Law 75 ‐ 100 2018 Am Law 100 firms (ranked by revenues) What the Am Law 100 looks like

175 2017 PPP Dots Groupings are of indexed to denote firms by revenues Red line connects the 2007 individual average of the 25 firms in (inflation firms each revenue grouping adjusted) 150

125 Am Law 100 Avg.

Zero growth 100

75 Am Law 1 ‐ 25 Am Law 26 ‐ 50 Am Law 51 ‐ 75 Am Law 75 ‐ 100 2017 Am Law 100 firms (ranked by revenues)

Source: Success in the Am Law 100 Is Being Driven by Management. Law firms, long thought to be bifurcating by size and profitability, have actually been separating based on something more simple over the past decade. By Hugh A. Simons and Nicholas Bruch | The American Lawyer, April 24, 2018 What the Am Law 100 looks like: quartiles by PPP

175 2017 PPP Dots Groupings are of indexed to denote firms by revenues Red line connects the 2007 individual average of the 25 firms in (inflation firms each revenue grouping adjusted) 150

125 Am Law 100 Avg.

Zero growth 100

75 PPP 1 ‐ 25 PPP 26 ‐ 50 PPP 51 ‐ 75 PPP 75 ‐ 100 2017 Am Law 100 firms (ranked by PPP)

100% 100%

75% 75%

50% 50%

Average 25% 25% Average

0% 0%

Percent change in real revenue, 2007 to 2017 ‐25% Percent change in real revenue, 2007 to 2017 ‐25%

‐50% ‐50% 100 75 50 25 10 100 80 60 40 20 10 2007 Am Law 200 Revenue rank 2007 Am Law 2007 PPP rank

Note: Firms shown are 2017 Am Law 100, i.e. constant firm basis. Revenue and PPP growth figures are adjusted for inflation. 37 SO, WHAT IS HAPPENING ?

38 The tyranny of averages

39 Mergers

40 Mergers: Nine notable combinations over the last decade

Husch Blackwell Blackwell Sanders with Husch & Eppenberger, 2007. Locke Lord Locke Liddel with Lord Bissell, 2008, and Locke Lord with Edwards Wildman, 2014. Bryan Cave Bryan Cave with Powell Goldstein, 2008. Hogan Lovells Lovells with Hogan & Hartson, 2009. K&L Gates K&L Gates with Bell Boyd & Lloyd, 2009, and with Middletons, 2012 Squire Patton Boggs Squire Sanders with Hammonds, 2010, and with Patton Boggs, 2014. DLA Piper DLA Piper with DLA Phillips Fox, 2011, and with Davis, 2015. Faegre Baker Daniels Faegre & Benson with Baker & Daniels, 2011. Arnold & Porter Arnold & Porter with Kaye Scholer, 2016.

Note: Firms chosen are those highlighted by year from 2007 to 2016 in “10 years of law firm mergers & acquisitions, 2007‐2016” by Altman Weil MergerLine™. Excludes due to lack of comparable 2007 and 2017 data: Dewey LeBoeuf; Dentons; Norton Rose Fulbright; and Eversheds/ Sutherland Asbill. 41 Mergers: Performance by PPP driver

2017 250 indexed The 9 merger to 2007, examples inflation 200 adjusted Mid‐point of Am Law 150 100

100

50 Revenue No. of lawyers Revenue per Cost per lawyer Profit per Lawyers per Eq. PPP lawyer lawyer Partner

42 Roadmap:

1. The Am Law 100’s hard‐won recovery

2. Consolidation, bifurcation, and mergers

3. Strategies that are working (and not)

4. Implications for partners

43 PPP performance over past decade not driven by size or PPP impact of firm profitability. strategy? Perhaps driven by firm strategy? • So, how to define firm strategy?

Principle: strategy should be defined by how firm appears to clients (not by how it appears to itself).

Hence, have attempted to characterize firm strategy by the service lines the firm offers

44 Service line strategies: Segmentation

Globalists: Serve clients globally—over 35 percent of lawyers outside of U.S.

Specialists: Boutiques: litigation, L&E, IP, and immigration.

Extensive Very broad offering—over 25 Chambers USA‐Nationwide ranked departments. service line:

Finance Less than 25 Chambers USA‐Nationwide ranked departments; majority are “Finance” practices focused: • Subdivided into broad‐line vs. narrow‐line (+/‐ 15 ranked departments).

Company Less than 25 Chambers USA‐Nationwide ranked departments; majority are “Company” practices focused: • Subdivided into broad‐line vs. narrow‐line (+/‐ 15 ranked departments).

National Serve clients nationally at a level below the elite firms stalwarts: • One (or no) Band 1 or Band 2 nationwide ranked departments.

Regionalist: One (or no) Band 1/Band 2 nationwide ranked departments and concentrated state rankings(2).

(1) Finance‐focused departments are: Banking & Finance; Capital Markets (all); Corporate/M&A (all); Financial Services (all); Investment Funds (all); Private Equity; Real Estate; REITs; Securities Litigation; Transportation: Aviation (Finance); Tax: Corporate & Finance. Company‐focused departments are all departments other than these. (2) As indicated by concentration index of more than 50 on a “1,000 x sum of the squared shares” scale). 45 2007 to 2017 PPP growth by service line strategy Extensive Company: Company: Super‐ Finance: National Finance: broad‐line broad‐line narrow‐line regionalists broad‐line stalwarts narrow‐line Globalists Specialists 175 Nelson Mullins 2017 Wilmer Hale Akin Gump PPP Vinson&Elkins Indexed Holland & K Kirkland Alston & Bird to 2007 King & Spald. Jenner&Block Davis Wright Fried Frank Faegre Baker & Host. 150 Paul Weiss Ropes& Grey Weil Gotshal Gibson Nixon Peab. Winston & St. Mid point Sidley Barnes & Th. of segments Davis Polk Drinker Bidd. Ogletree Deakins Perkins Coie Troutman Quinn Emanuel Venable Lewis Brisb. Williams & Connolly Proskauer Wilson Sons. Skadden Kilpatrick Town. 125 Paul Hastings Cozen; Fenwick Cooley Akerman Latham Cleary Polsinelli DLA Piper Baker Botts Seyfarth Shaw Sheppard M. S&C Cahill Gordon Mid point of Blank Rome Milbank Goodwin Am Law 100 Morrison & F. Crowell McGuire W. White & Case Fish & Richardson Kramer Levin Willkie Farr Covington Pillsbury Katten Jones Day Hunton & Will. Simpson Foley & Lard. Mayer Brown Greenberg Tr. Mintz Levin Debevoise Baker Donel. Shearman O’Melveny Duane Morris Cravath Baker McKenzie Husch Black. Squire 100 Ballard Spahr Haynes & Reed Smith McDermott Dechert Bryan Cave Wachtell K&L Gates Orrick Boone Jackson Lewis Schulte Littler Mendelson Arnold & Porter Hogan Lovells Fragomen Locke Lord Boies Schiller Steptoe & Johnson Shook Hardy Morgan Lewis Cadwalader 75

46 WE UNDERSTAND DIRECTORIES AREN’T PERFECT.

47 …it has adopted a business model that nearly off of its cohort have abandoned.

“We don’t just want to do the elite work for our clients,” Speights says. “We want to do all of their business”

48 Mortgage backed securities

Issuer’s Counsel: Total Value Underwriter’s Counsel: Total Value 250 120 $B $B

100 200

80 150

100 40

50 20

0 0 06 07 08 09 10 11 12 13 14 15 16 06 07 08 09 10 11 12 13 14 15 16

Source: Mergermarket. Data shown are total transaction value for Cadwalader. 49 Hand‐painting for Globalists too Cleary and Fragomen included in other segments

90% Percent of lawyers outside of U.S. Baker McKenzie

75%

White & Case DLA Piper Hogan Lovells 60% Squire Shearman Cleary Gottlieb 45% Mayer Brown Fragomen 35 percent K&L Gates cut‐off Jones Day Reed Smith 30%

15%

0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Note: Cleary Gottlieb and Fragoman are above 35 percent cut‐off but belong more naturally in ‘Finance’ and “Specialist“ segments, respectively. 50 WE ALSO UNDERSTAND THAT PPP ISN’T PERFECT.

51 The PPP tension

Measures something Can be gamed critical to strategy

Distortions are moderated in this analysis: 1. We’re looking at market peak to market peak, so are focused on times when any overstatement is likely to be low. 2. We’re looking at changes in PPP, so a consistent overstatement is washed out • Firms inclined to overstating PPP but inclined to match reported and ‘real’ PPP growth. 3. Empirical evidence that, though flawed, it captures something important

52 While imperfect, PPP captures something important Example: Lateral partner retention is higher for movers to higher PPP firms

Retention by PPP rank of new firm Retention by change in firm PPP rank 90% 90% 5‐year Lateral partner 80% retention 80% rate, % 70% 70%

Avg. Avg.

60% 60%

50% 50% PPP 76 ‐ 100 PPP 51 ‐ 75 PPP 26 ‐ 50 PPP 1 ‐ 25 Down 40 Down 20 Down 1 Up 1 to Up 21 to Up 41 to to 79 to 39 to 19 20 40 80 PPP rank of new firm Change in firm PPP rank

Source: When is the Best Time to Make a Lateral Move? Hugh A. Simons and Paola Cecchi‐Dimeglio, The American Lawyer 5 October 2017. 53 (One of these quotes is inaccurate)True or false?

No one pretends that No one pretends that democracy is perfect PPP is perfect or all‐ or all‐wise. Indeed it is wise. Indeed it is the the worst form of worst form of profit Government except for measurement except all those other forms for all those others that have been that have been tried.…’ tried.…’

Winston Churchill Winston Churchill 11 November 1947 11 November 1947

54 Strategies: over‐performing, under‐performing, and bi‐modal? Extensive Company: Company: Super‐ Finance: National Finance: broad‐line broad‐line narrow‐line regionalists broad‐line stalwarts narrow‐line Globalists Specialists 175 Nelson Mullins 2017 Wilmer Hale Akin Gump Key: PPP Vinson&Elkins Indexed Holland & K Winning Kirkland Alston & Bird Losing to 2007 King & Spald. Bi‐modal Jenner&Block Davis Wright Fried Frank Faegre Baker & Host. 150 Paul Weiss Ropes& Gray Weil Gotshal Gibson Nixon Peab. Winston & St. Mid point Sidley Barnes & Th. of segments Davis Polk Drinker Bidd. Ogletree Deakins Perkins Coie Troutman Quinn Emanuel Venable Lewis Brisb. Williams & Connolly Proskauer Wilson Sons. Skadden Kilpatrick Town. 125 Paul Hastings Cozen; Fenwick Cooley Akerman Latham Cleary Polsinelli DLA Piper Baker Botts Seyfarth Shaw Sheppard M. S&C Cahill Gordon Mid point of Blank Rome Milbank Goodwin Am Law 100 Morrison & F. Crowell McGuire W. White & Case Fish & Richardson Kramer Levin Willkie Farr Covington Pillsbury Katten Jones Day Hunton & Will. Simpson Foley & Lard. Mayer Brown Greenberg Tr. Mintz Levin Debevoise Baker Donel. Shearman O’Melveny Duane Morris Cravath Baker McKenzie Husch Black. Squire 100 Ballard Spahr Haynes & Reed Smith McDermott Dechert Bryan Cave Wachtell K&L Gates Orrick Boone Jackson Lewis Schulte Littler Mendelson Arnold & Porter Hogan Lovells Fragomen Locke Lord Boies Schiller Steptoe & Johnson Shook Hardy Morgan Lewis Cadwalader 75

55 Strategies: over‐performing, under‐performing, and bi‐modal? Extensive Company: Company: Super‐ Finance: National Finance: broad‐line broad‐line narrow‐line regionalists broad‐line stalwarts narrow‐line Globalists Specialists 175 Nelson Mullins 2017 Wilmer Hale Akin Gump PPP Vinson&Elkins Indexed Holland & K Kirkland Alston & Bird to 2007 King & Spald. Jenner&Block Davis Wright Fried Frank Faegre Baker & Host. 150 Paul Weiss Ropes& Gray Weil Gotshal Gibson Nixon Peab. Winston & St. Mid point Sidley Barnes & Th. of segments Davis Polk Drinker Bidd. Ogletree Deakins Perkins Coie Troutman Quinn Emanuel Venable Lewis Brisb. Williams & Connolly Proskauer Wilson Sons. Skadden Kilpatrick Town. 125 Paul Hastings Cozen; Fenwick Cooley Akerman Latham Cleary Polsinelli DLA Piper Baker Botts Seyfarth Shaw Sheppard M. S&C Cahill Gordon Mid point of Blank Rome Milbank Goodwin Am Law 100 Morrison & F. Crowell McGuire W. White & Case Fish & Richardson Kramer Levin Willkie Farr Covington Pillsbury Katten Jones Day Hunton & Will. Simpson Foley & Lard. Mayer Brown Greenberg Tr. Mintz Levin Debevoise Baker Donel. Shearman O’Melveny Duane Morris Cravath Baker McKenzie Husch Black. Squire 100 Ballard Spahr Haynes & Reed Smith McDermott Dechert Bryan Cave Wachtell K&L Gates Orrick Boone Jackson Lewis Schulte Littler Mendelson Arnold & Porter Hogan Lovells Fragomen Locke Lord Boies Schiller Steptoe & Johnson Shook Hardy Morgan Lewis Cadwalader 75

56 Kirkland & Ellis: Profit growth profile

2017 Values Indexed to 2007 K&E Revenue 204 Revenues doubled (real) No. of lawyers 166 Very strong, slightly lower, lawyer growth… Revenue per lawyer (RPL) 123 Yields strong RPL growth

Cost per lawyer 89 Costs per lawyer down… Profit per lawyer (PPL) 171 Hence, PPL growth exceeds revenue growth

Lawyers per equity partner 94 Leverage actually declined—very unusual, Profit per equity partner (PPP) 161 Hence PPP growth below PPL growth

Associates per eq. partner 90 Leverage decline driven by fewer associates per Non‐eq. partner per eq. partner 99 equity partner; non‐equity partners per equity partner held flat.

57 The power of a high compensation ratio Model for $3M PPP firms with 3:1 AND 9:1 top‐to‐bottom ratios

25% Percent of partners 20% 3:1 Firm 9:1 Firm 15%

10%

0% $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0 $5.5 $6.0 $6.5 $7.0 + Compensation ‘bucket’

Notes: The dollar numbers shown for the buckets refer to the center point of the bucket so that, for example, $1.0M captures partners with comp levels between $0.75 and $1.25M. The 3:1 and 9:1 ratios refer to the average compensation of the top ten percent of partners divided by that of the bottom ten percent. The analysis assumes the compensation distribution follows a log‐normal (i.e. a skewed bell curve) distribution. Source: Compensation Ratios are Spreading in Big Law, by Hugh A. Simons, Bloomberg Big Law Business, January 13, 2017. 58 Lateral partner retention Gibson Latham & Kirkland & 5‐year 100% Dunn Watkins Ellis retention rate

75% Am Law average:

50%

25%

Sources: ALM Intelligence database, firm web sites, LinkedIn, Martindale‐Hubbell. Notes: Based on tracking of 1,235 who moved from Am Law 200 firms between 2010 and 2012. 59 Kirkland’s pyramid Sidley Kirkland Latham & Skadden Am Law 100 Austin & Ellis Watkins Arps Average Equity partners 1.0 1.0 1.0 1.0 1.0

Non‐equity partners per equity 1.0 1.3 0.4 0.0 0.7 partner

Associates per equity partners 3.6 2.9 3.7 4.0 2.9

0123401234012340123401234 Total leverage: 4.64.2 4.1 4.0 3.6

60 Kirkland: A true, growing, non‐equity partner cohort

$1.2 Average non‐ Latham equity $1.0 2017 partner comp, $M Gibson 2007 (real) $0.8 2017 Sidley 2017

2007 $0.6 Kirkland 2007 2007 2017

$0.4

$0.2

$0.0 0 100 200 300 400 500 600 Number of non‐equity partners

61 Strategies: over‐performing, under‐performing, and bi‐modal? Extensive Company: Company: Super‐ Finance: National Finance: broad‐line broad‐line narrow‐line regionalists broad‐line stalwarts narrow‐line Globalists Specialists 175 Nelson Mullins 2017 Wilmer Hale Akin Gump PPP Vinson&Elkins Indexed Holland & K Kirkland Alston & Bird to 2007 King & Spald. Jenner&Block Davis Wright Fried Frank Faegre Baker & Host. 150 Paul Weiss Ropes& Gray Weil Gotshal Gibson Nixon Peab. Winston & St. Mid point Sidley Barnes & Th. of segments Davis Polk Drinker Bidd. Ogletree Deakins Perkins Coie Troutman Quinn Emanuel Venable Lewis Brisb. Williams & Connolly Proskauer Wilson Sons. Skadden Kilpatrick Town. 125 Paul Hastings Cozen; Fenwick Cooley Akerman Latham Cleary Polsinelli DLA Piper Baker Botts Seyfarth Shaw Sheppard M. S&C Cahill Gordon Mid point of Blank Rome Milbank Goodwin Am Law 100 Morrison & F. Crowell McGuire W. White & Case Fish & Richardson Kramer Levin Willkie Farr Covington Pillsbury Katten Jones Day Hunton & Will. Simpson Foley & Lard. Mayer Brown Greenberg Tr. Mintz Levin Debevoise Baker Donel. Shearman O’Melveny Duane Morris Cravath Baker McKenzie Husch Black. Squire 100 Ballard Spahr Haynes & Reed Smith McDermott Dechert Bryan Cave Wachtell K&L Gates Orrick Boone Jackson Lewis Schulte Littler Mendelson Arnold & Porter Hogan Lovells Fragomen Locke Lord Boies Schiller Steptoe & Johnson Shook Hardy Morgan Lewis Cadwalader 75

62 Globalists in context (I)

Nelson Mullins Average 175 2017 PPP Wilmer Hale AkinGump High & Low but Holland & K Vinson&Elkins Rising indexed to growing 2007 Alston & Bird Fried Frank Kirkland Davis Wright Baker & H. King & (real) Jenner&Block Paul Weiss 150 Faegre Spald. Nixon Peab. Ropes& Gray Gibson Weil Gotshal Barnes & Th. Williams & Sidley Davis Polk Ogletree Deakins Quinn Emanuel Perkins CoieConnolly Lewis Brisb. Proskauer Venable Paul Hastings Skadden 125 Kilpatrick DLA Piper Cleary Cahill Gordon Akerman Polsinelli Baker B. Latham Average Fish & Richardson MoFo White & Case Milbank S&C Blank Rome Katten Goodwin Covington Kramer Levin Shearman Willkie Farr Simpson Baker Donel. Jones Day Mayer Debevoise Cravath Squire O’Melveny 100 Ballard Baker McK Brown Bryan C. Reed Smith McDermott Dechert Littler Mendelson K&L Hogan Lovells Orrick Wachtell Jackson Gates Steptoe Schulte Boies Schiller Lewis Locke Lord Arnold & Porter Fragomen Shook Hardy Cadwalader Morgan Lewis 75

Low & High but Falling Falling 50 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 2007 PPP (inflation adjusted to 2017 dollars)

63 Globalists in context (II)

Average 175 2017 PPP High & Low but Rising indexed to growing 2007 (real) 150

125 DLA Piper Average Baker White & Case Jones Day McKenzie Mayer Brown Shearman 100 Squire K&L Gates Reed Smith Hogan Lovells

Low & High but Falling Falling 50 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 2007 PPP (inflation adjusted to 2017 dollars)

64 A challenge for the “Finance side” globalist firm?

Chambers USA Nationwide Band Key: Shearman & Sterling White & Case Mayer Brown Ranking Change National Practice Area: 2007 2017 2007 2017 2007 2017 Rise Banking & Finance 2 4 2 3 3 NR Fall Capital markets/debt & equity 2 3 4 NR Capital markets/high yield 2 NR Capital markets/securitization 2 1 Corporate/M&A 4 4 4 4 4 NR

Financial Services Regulation: •Banking & Sec. (Reg. Comp.) 2 4 4 NR 3 3 •Securities (Reg. Enf. & Investig.) 2 NR REITs 2 NR 2 NR Tax: Corporate 3 4 2 3 Transportation: Aviation Finance 4 NR 3 2

65 Source: Chambers & Partners, Chambers USA, 2007 & 2017. Practice areas shown are those where the firm was ranked in 2007 and same category exists in 2017 rankings. Key: Ranking Change A challenge for the “Company side” globalist firm? Rise Fall

Chambers USA Nationwide Band; Company‐side practices DLA Piper Hogan Lovells Jones Day Mayer Brown National Practice Area: 2007 2017 2007 2017 2007 2017 2007 2017 Appellate 4 NR 2 NR 1 1 Outsourcing 4 4 2 NR Energy: Electricity 4 NR Energy: Oil & Gas 3 3 ERISA Litigation Food & Beverage 2 1 Franchising 1 1 4 NR Government: Contracts 2 NR 3 2 3 3 Government: Relations 2 3 2 2 4 3 Insurance: firms 3 NR International Arbitration 5 4 4 NR 5 NR International Trade 5 NR 2 2 3 NR Intellectual Property 1 2 3 NR Labor & Employment 1 1 Leisure & Hospitality 2 3 3 3 Life Sciences 2 2 Products Liability 3 2 4 NR 1 3 4 3 Retail 1 1 1 1 66 Source: Chambers & Partners, Chambers USA, 2007 & 2017. Practice areas shown are those where the firm was ranked in 2007 and same category exists in 2017 rankings. Strategies: over‐performing, under‐performing, and bi‐modal? Extensive Company: Company: Super‐ Finance: National Finance: broad‐line broad‐line narrow‐line regionalists broad‐line stalwarts narrow‐line Globalists Specialists 175 Nelson Mullins 2017 Wilmer Hale Akin Gump PPP Vinson&Elkins Indexed Holland & K Kirkland Alston & Bird to 2007 King & Spald. Jenner&Block Davis Wright Fried Frank Faegre Baker & Host. 150 Paul Weiss Ropes& Gray Weil Gotshal Gibson Nixon Peab. Winston & St. Mid point Sidley Barnes & Th. of segments Davis Polk Drinker Bidd. Ogletree Deakins Perkins Coie Troutman Quinn Emanuel Venable Lewis Brisb. Williams & Connolly Proskauer Wilson Sons. Skadden Kilpatrick Town. 125 Paul Hastings Cozen; Fenwick Cooley Akerman Latham Cleary Polsinelli DLA Piper Baker Botts Seyfarth Shaw Sheppard M. S&C Cahill Gordon Mid point of Blank Rome Milbank Goodwin Am Law 100 Morrison & F. Crowell McGuire W. White & Case Fish & Richardson Kramer Levin Willkie Farr Covington Pillsbury Katten Jones Day Hunton & Will. Simpson Foley & Lard. Mayer Brown Greenberg Tr. Mintz Levin Debevoise Baker Donel. Shearman O’Melveny Duane Morris Cravath Baker McKenzie Husch Black. Squire 100 Ballard Spahr Haynes & Reed Smith McDermott Dechert Bryan Cave Wachtell K&L Gates Orrick Boone Jackson Lewis Schulte Littler Mendelson Arnold & Porter Hogan Lovells Fragomen Locke Lord Boies Schiller Steptoe & Johnson Shook Hardy Morgan Lewis Cadwalader 75

67 King & Spalding and Wilmer Hale: A contrast in PPP drivers

King & Wilmer 2017 Values Indexed to 2007 Spalding Hale Revenue 156 102 K&S had stronger revenue growth but WH got No. of lawyers 133 89 to same RPL growth with reduced number of Revenue per lawyer (RPL) 117 114 lawyers.

Cost per lawyer (CPL) 94 93 Comparable CPL reductions so K&S’s RPL Profit per lawyer (PPL) 171 151 advantage translates to higher PPL advantage.

Lawyers per equity partner 92 111 However, K&S reduced leverage while WH Profit per equity partner (PPP) 158 168 increased leverage so relative strengths switch as PPL is translated to PPP

68 Litigation boutiques: Contrasting PPP drivers

Quinn Williams Boies Shook 2017 Values Indexed to 2007 Emanuel & Conn. Schiller Hardy Revenue 271 153 139 94 Only Quinn increased RPL No. of lawyers 219 147 133 94 substantially. Revenue per lawyer 124 104 104 100

Cost per lawyer 112 102 91 94 Boies reduced costs, yielding Profit per lawyer 131 107 128 112 PPL comparable with Quinn

Lawyers per equity partner 102 124 68 76 Profit per equity partner 133 133 87 85

Quinn: held leverage Williams & Connolly Boise reduced leverage, constant so PPL grew leverage to thereby translating high PPL growth translated amplify PPL into growth to lower PPP growth directly to PPP growth higher PPP

69 Roadmap:

1. The Am Law 100’s hard‐won recovery

2. Market bifurcation and consolidation

3. Strategies that are working (and not)

4. Implications for partners

70 Partner complacency is high and rising

75% We are not feeling enough economic 61% pain to motivate 60% more significant change 45%

30%

15%

0% 2015 2016 2017

Source: 2017 Law Firms in Transition, An Altman Weil Flash Survey Note: Question asked: why isn’t your firm doing more to change the way it delivers legal services 71 Failing to look around corners? Currently 106 months 140 Duration into the second‐longest of post‐war expansion expansion, 120 (months)

100

0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Year in which expansion started

Source: National Bureau of Economic Research (NBER) 72 1. Don’t do stupid stuff. Go after lightly‐differentiated work with low leverage. Have the range of partner comp be narrower than the range of economics of individual partners’ practices Grow by planting flags around the globe. Hire laterals without talking to their past clients and colleagues. Pursue a “catch a falling knife” acquisition. Emphasize tenure over contribution in the partner comp system. Play in segments where you’ve no right to think you can win. Forsake after‐action reviews on laterals, etc. because they risk embarrassment. Pull your punches on providing feedback to peers and leaders. Hire laterally a partner group in an unrelated practice. Open an office through lateral hires and not transfer a senior, home‐grown partner Give compensation guarantees. Fail to constrain leaders’ flights of grandiosity. Leave unfunded partner pension schemes uncapped. 73 2. Let leaders manage

Today Suggestion

“Parallel “Command play” Managerial intensity and control”

Leaders Partners

74 Questions, comments, better ideas? Nicholas Bruch [email protected] @NicholasBruch

Hugh A. Simons [email protected] @SimonsHugh

PowerPoint Slides available upon request: [email protected].