August 1, 2005 — Membership in a megafirm isn't the only ticket to living high on the hog. The partners in The Am Law 200's Second Hundred – firms number 101 to 200 on our list of the nation's highest-grossing firms – are doing just fine, despite the fact that their average size is just 260 lawyers. Second Hundred gross revenues went up more than 7 percent in 2004, on average, while revenue per lawyer grew by almost 9 percent. What's more, the Second Hundred saw almost an 11 percent growth in profits per partner. Thirteen Second Hundred firms had average profits per equity partner of $1 million or more, six more than in 2003.

Despite that cheery news, the reality is that the Second Hundred is still the poor cousin of The Am Law 100 – firms 1 through 100 in our ranking – and getting poorer by comparison. The Second Hundred's average profits per equity partner in 2004 ($566,000) significantly trail that of The Am Law 100 ($959,000). It's a gap that's been growing consistently, albeit slowly, since at least 2001, when the difference was about $323,000 (it is now $393,000). More than a third of the Am Law 100 firms – 37, to be exact – had profits per partner above $1 million in 2004, compared to the Second Hundred's 13. Eight Am Law 100 firms pulled in $2 million or more in profits per equity partner, while only one Second Hundred firm (Boies, Schiller & Flexner) made that cut.

In other words, bigger still means richer. But that doesn't mean there aren't pockets of gold to be mined by Second Hundred firms. The trick is identifying the hot spots, then holding on to those riches on a consistent basis. Second Hundred firms tend to be more dynamic in their financial results, with greater variance from year to year, than Am Law 100 firms. That's because Second Hundred firms often are more entrepreneurial, specialized and comfortable with risk in the area of billing. While legal Brahmans dominate The Am Law 100's profits per partner rankings, in the Second Hundred it's not always the firms with the most sophisticated work and the fanciest pedigrees that haul in the big bucks. Nor does the avenue to riches for Second Hundred firms necessarily start and end on Wall Street, though the most profitable Second Hundred firms tend to be clustered in New York, Los Angeles and Washington, D.C. In short, there is no typical million-dollar Second Hundred firm. The categorization encompasses elite and pedestrian practitioners, old guards and arrivistes. If nothing else, the Second Hundred offers a glimpse of the eclecticism, diversity and fluidity of this part of the American legal elite.

Consider New York litigation shop Kasowitz, Benson, Torres & Friedman, last year's biggest winner in the area of profits per partner, and one of this year's biggest losers, at least on a percentage basis. In 2003 Kasowitz Benson recorded a whopping $2.9 million in profits per partner, thanks to a $55 million contingency fee jackpot for its work on a personal injury case. In 2004, though, Kasowitz Benson's profits per partner plunged to $1.5 million – a 50 percent drop (although still a handsome amount). Washington, D.C.'s Dickstein Shapiro Morin & Oshinsky also took a hit in average profits per partner, 58 percent – from $1.9 million in 2003, when the firm received a contingency fee windfall – to $815,000 in 2004. Meanwhile, contingency wins cranked up profits per partner at Los Angeles' Quinn Emanuel Urquhart Oliver & Hedges by 38 percent, raising its profits per partner from $1.4 million in 2003 to $1.9 million in 2004.

It's not just contingency players that experience fluctuations: Mountain View, Calif.'s Fenwick & West witnessed almost a 47 percent increase in profits per partner, from $635,000 in 2003 to $935,000 in 2004, for reasons that almost sound mundane. "We had growth across the board [meaning corporate, litigation and tax work]," says managing partner Laird Simons III, plus "a drop in expenses [because] of a significant reduction in our lease." (Fenwick's equity partner count also went down by 7 percent, from 73 in 2003 to 68 in 2004.)

For evidence of the diversity of the Second Hundred, look to this year's seven new additions to The Am Law 200. They include New York immigration shop Fragomen, Del Rey, Bernsen & Loewy; Greenville, S.C., labor and employment firm Ogletree, Deakins, Nash, Smoak & Stewart; and San Francisco's Gordon & Rees, which is best known for insurance defense work. General practice regional firms are represented too: Kansas City, Mo.'s Lathrop & Gage; Atlanta's Morris, Manning & Martin; Reading, Pa.'s Stevens & Lee; and Richmond, Va.'s Williams Mullen. Firms that dropped off the list included Fish & Neave (it merged into Ropes & Gray); Pennie & Edmonds (it closed); and four firms whose revenues were below our cutoff: San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin; Philadelphia's Schnader Harrison Segal & Lewis; Cincinnati's Dinsmore & Shohl; and Los Angeles' Lewis Brisbois Bisgaard & Smith.

Fragomen Del Rey is a case study of the Second Hundred's skill at exploiting gaps in the legal market. The firm, founded in 1951, is barely known outside the immigration bar. In 2004 it had just over $1 million in profits per equity partner – an impressive sum, especially for a firm not typical of The Am Law 200's mainstream. And the firm squeezes out these profits from immigration work, something that many general practice firms shun as a low-margin practice. Fragomen seems to have found the sweet spot in that business. "We're in the business of high-skilled migrants who work for multinational corporations," says Fragomen Del Rey name partner Austin Fragomen, who estimates that the firm handles about 100,000 immigration transactions a year.

Part of the secret of the firm's success is leverage. The firm employs 150 lawyers, but 400 paralegals, giving the firm a paralegal-to-lawyer ratio of nearly 3:1. The tiny size of the partnership also helps enhance profitability: The firm has just 33 partners, only 25 of whom have equity status. Nonetheless, Fragomen insists that partnership prospects are good at the firm. Associates start at $95,000, and "catch up [with the big law firm pay] in five years," he says. Recruitment is not a problem, he adds: "This is a very hot field."

The firm's "big step up," says Fragomen, happened during the tech boom of the late '90s, when increased demand for skilled workers from overseas led multinational corporations to outsource immigration work that they had been handling in-house or awarding to local firms on a piecemeal basis. As a result, 90 percent of Fragomen Del Rey's work now comes from corporations, with the remaining 10 percent coming from individuals. That's a virtual flip from the proportion 30 years ago, when individuals dominated the client pool, Fragomen says. The firm works on a fixed-fee basis, billing by the project, not by the hour.

"There's a perception that commodity work is bad, but it's just structured differently," says Lisa Smith, a Washington, D.C.-based consultant with Hildebrandt International. "You don't need to do it in New York City with Harvard Law graduates." In the case of Fragomen Del Rey, the fixed-fee system helps increase profitability, says Smith, because "it's not a partner-intensive model."

Other Second Hundred firms are receptive to fixed-fee arrangements too, sometimes by necessity. Flexibility and creativity in billing arrangements "helps [Second Hundred firms] compete for work against the larger firms," Smith notes.

Being open to alternative billing methods hasn't hurt Thacher Proffitt & Wood, a 100-plus-year-old New York firm with a thriving structured finance practice. In 2004 profits per partner at Thacher Proffitt climbed to $1 million, an impressive feat, considering that its profits per partner were just $480,000 four years earlier. Revenue per lawyer has also risen more than 40 percent in the last four years, from $410,000 in 2000 to $685,000 last year, while the size of the equity partnership has remained relatively stable, increasing from 48 in 2000 to 51 in 2004.

Although its lawyer count is less than 200, Thacher Proffitt regularly bids against firms many times its size on transaction matters, says managing partner Paul Tvetenstrand. "We've always known we're as good as Simpson Thacher, Cleary, or Skadden," he says. About half of the firm's structured finance deals are based on fixed-fee arrangements, Tvetenstrand says.

And although he's reluctant to attribute his firm's success directly to alternative billing, Tvetenstrand says that his firm takes an "innovative" attitude toward billing and that "we've been able to get a larger market share [of deals] as a result."

Fixed fees benefit both clients and firms, he adds: "It gives price certainty to clients, and incentive to be more efficient [to the lawyers]." More important, perhaps, fixed billings are what financial institution clients want, says Tvetenstrand. "One day, billable hours will be gone in the transactional arena," he predicts.

What's striking is that none of this year's new entrants to the Second Hundred's million-dollar profits per partner club – Fragomen Del Rey; Hughes Hubbard & Reed; Munger, Tolles & Olson; Patterson Belknap Webb & Tyler; Swidler Berlin; and Thacher Proffitt – are contingency players, technology firms or practitioners of the Next Big Thing.

Consider Los Angeles' Munger, Tolles. Known as small (fewer than 200 lawyers), uber-selective (lots of former U.S. Supreme Court clerks and law reviewers) and narrowly focused (litigation is dominant, though it also has a strong corporate department), it was founded only in 1962. But it's strictly old-school in that all partners have equity, and hourly billings still reign supreme. For a relatively small firm, it has an enviable list of clients, including Berkshire Hathaway Inc. (firm founder Charles Munger is vice chair of the company); NBC Universal Inc.; and Southern California Edison Co.

Another entrant to the $1 million club is Washington, D.C.'s Swidler Berlin. Known for its regulatory and government relations practice, Swidler reported a 14 percent increase in profits per partner for 2004. In a written statement, Swidler Berlin managing partner Barry Direnfeld said, "We showed substantial strength in all of our practice groups last year, but particularly in our telecommunications, insurance, government affairs and real estate practice areas."

But Swidler's future is uncertain: Early this year it lost most of its New York office when 57 of the office's 64 attorneys jumped to Dechert's New York office, and an eight-person antitrust team went to Dechert's Washington, D.C., office.

The two old-line firms on the Second Hundred's most-profitable list – Hughes Hubbard and Patterson Belknap – were dismissed as dinosaurs less than a decade ago. But both firms have made successful turnarounds in recent years, without destroying their long-standing reputations for collegiality. Patterson Belknap has retained an all-equity-partner structure, while Hughes Hubbard has just six nonequity partners among its 76 partners. In 2004 both firms reported strong performances by their litigation departments. And both firms seem to be reaping the fruits of a more focused practice. Hughes Hubbard's strengths are litigation, arbitration and corporate work (specifically, private equity and mergers and acquisitions), while Patterson Belknap's are litigation (white-collar criminal defense and intellectual property), tax-exempt organizations and American depository receipts (ADRs).

"We don't try to be all things to all people," says Hughes Hubbard managing partner Candace Beinecke. "I don't know what it means to be full-service anymore." Likewise, Patterson Belknap managing partner Rochelle Korman says that her firm has decided to become a niche player in arcane specialties, like foundations and ADRs: "Life is complicated, and business is complicated," she says. "And you need to have depth in complicated areas of law."

A little reinvention. A little innovation. The Second Hundred firms may not be the biggest kids on the block, but they know how to follow the money.