US law firms face worst year for PEP since 1991

Profits fall 4.3% at top US firms while revenue edges up to $67bn; Wall Street elite bears brunt as market stalls

America's legal elite has emerged from its worst financial year since 1991 as partner profits and lawyer productivity at the US's top 100 law firms fell for the first time in 17 years.

Eagerly-awaited 2008 results from Legal Week's sister title The American Lawyer confirms the dramatic impact of a fourth quarter dominated by financial turmoil, leading to an immediate global slump in demand for legal services.

The figures, the first comprehensive picture of the world's largest legal market in 2008, show profits per equity partner (PEP) falling 4.3% to an average of $1.26m (£851,000) while revenue per lawyer (RPL) fell 1.2% to $818,000 (£553,000).

Despite the group managing revenue growth of 4.1%, with the top 100 firms billing a total of $67bn (£45bn), the results signal the end of a five-year run in which US law firms had regularly achieved double-digit percentage growth in profits and fee income.

Key findings include:

• Profitability suffered as firms failed to scale back staff growth, with headcount rising 5.4% to 81,992 lawyers.
• New York firms were among the worst hit, with Cravath Swaine & Moore and Wachtell Lipton Rosen & Katz seeing dramatic falls in profitability.
• Eight top 100 firms saw double-digit percentage falls in RPL, underlining the fall in demand for legal services.
• The number of firms with PEP of $2m (£1.35m) or over fell from 19 in 2007 to 16.
• Twenty-two firms saw falls in revenue, including Latham & Watkins, O'Melveny & Myers and Shearman & Sterling.

However, overall figures mask widely diverging performances across the group, with some regional markets and litigation-driven firms performing well above trend. In contrast, leading New York firms, internationally-focused practices and expansive national law firms have largely struggled.

Rohan Weerasinghe, senior partner at New York's Shearman & Sterling, commented: "2008 was [like] two different years in one - the first was not so bad then the markets fell out of bed in the latter part. We were fortunate that the financial institutions work that we have done has mitigated the loss of work elsewhere."

The five firms that saw the sharpest falls in RPL, the key measure of lawyer productivity, were: Cravath (-18.2%), Wachtell (-13.4%), Mayer Brown (-13.3%), Simpson Thacher & Bartlett (-12.7%) and Latham (-12.4%).

The results also set the scene for what promises to be an even tougher current financial year, an expectation that has in 2009 triggered a wave of deep jobs cuts at many US law firms.

Many senior lawyers believe the US legal market is set to see a fall in revenues in 2009 for the first time in recent memory.

Falls in demand are likely to be compounded by intense pressure on fee levels from clients - also a contrast to recent years during which law firms have been able to largely pass on soaring staff costs.

However, some US lawyers believe that the worst of the downturn has already passed, citing a recent upturn in finance work and a steady stream of bankruptcy instructions.

Dewey & LeBoeuf chairman Steven Davis said: "I am certainly not pessimistic about 2009 despite the very clear challenges that it will give all law firms. I feel very good about where we are."

The 2008 results in the US look to be more upbeat than equivalent results in the UK, where many major firms are expecting to see falls in revenue in their 2008-09 figures.

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