Nothing grows forever. For the first time since 1991, both average profits per partner and revenue per lawyer dipped last year among the Am Law 100 firms, the top-grossing firms in the nation. And, given the weakness in the market thus far in 2009, another decline seems likely this year.

Those are the headlines from our twenty-third annual Am Law 100 report. These results are for 2008. They capture the start of the economic distress that set the stage for record law firm layoffs and anxiety but, because of the cutoff date, they mask the distress many firms are now dealing with. Last year, overall gross revenue grew by 4.1 percent, to $67 billion, a new record. But head count grew faster, increasing by 5.4 percent, to 81,992 lawyers. As a result of that growth, plus a serious drop in demand during the second half of 2008 for high-end work–especially in the corporate and finance sectors–profits per partner (PPP) fell by 4.3 percent, to an average of $1.26 million, and revenue per lawyer (RPL) dropped 1.2 percent, to $818,000.

The downturn was widespread but not ubiquitous. On average it was felt most acutely among the firms that we classify as New York, national, and international. Firms in those three categories, which include 57 of The Am Law 100, suffered profit and RPL drops. By contrast, the 12 firms headquartered in Texas and Washington, D.C., when taken together, showed both revenue and profit gains. The rest of the firms were, on average, flat on revenue and down about 3 percent on profits.

Even in a down year, there were bright spots. Sixteen firms logged profits per partner of $2 million or more, down from last year’s record 19. Five firms joined The Am Law 100, including 12-year-old Boies, Schiller & Flexner [see Don’t Bet Against the House; subscription only] and newly merged Husch Blackwell Sanders [see Priced to Sell]. For those keeping score, Boies Schiller joins with PPP of more than $3 million, roughly $500,000 ahead of Cravath, Swaine & Moore, the firm David Boies left in 1997. Two other positive notes: Howrey, coming off a big litigation year, led the pack with a 15.2 percent increase in revenue per lawyer, the key metric for judging the health of a firm, and Wilmer Cutler Pickering Hale and Dorr, with strong white-collar, regulatory, and IP work, became the eighteenth firm to have a seven-figure RPL.

For all the hand-wringing, there was little relative change in law firm standings. For example, comparing year-over-year ranks on PPP, only six firms moved up a quintile, most notably Gibson, Dunn & Crutcher into the first tier.

As of the end of 2008, The Am Law 100 was essentially still a bit ahead of where it was in fiscal year 2006, which, at the time, was hailed as yet another record year. But after 17 years of steady and sometimes spectacular growth, it’s hard to find many big-firm lawyers who remember an industry-wide downturn. Since 1991, when George H.W. Bush was in the White House, Barack Obama was leaving the presidency of the Harvard Law Review, and Tim Berners-Lee launched the first Web site, Am Law 100 firms have doubled in size and gross, while the profits of their partners have shot up by a dizzying 215 percent. The firms now sit delicately on a large and lush plateau, from which there is a long way to fall.

The firms didn’t climb this high by accident. Here are some performance points to ponder as they go forward:

THE GROWTH IMPERATIVE

There are two explanations for last year’s results. First, a drop in demand, over which firms have little or no control. Second, a surge in lawyer head count—2008 was the second fastest-growing year since 2001—over which firms have complete control.

There is plenty of blame to go around. We don’t pay much heed to the blanket criticism that many law firms grow just for the sake of growing. But we do pay attention to results. And here’s the bad news for firm managers and owners: At 71 firms last year, the percentage change in lawyer head count was greater than the percentage change in profits per partner. To put that more bluntly, the failure of two-thirds of the firms to restrain their lawyer hiring cost their partners money.

Here’s a list of the five firms headquartered outside New York where the growth in lawyers outstripped PPP by the largest margins: Mayer Brown; Latham & Watkins; Ballard Spahr Andrews & Ingersoll; Orrick, Herrington & Sutcliffe; and Goodwin Procter. And here are the five inside New York: Cravath; Davis Polk & Wardwell; Fried, Frank, Harris, Shriver & Jacobson; Milbank, Tweed, Hadley & McCloy; and Wachtell, Lipton, Rosen & Katz.

Since we began tracking The Am Law 100 in 1987, law firm growth has fluctuated between periods of plus-size lawyer hiring and several years of negative or low growth. Five lean years followed the bust of 2001. For the last two years, firms again increased their lawyer head count by more than 5 percent annually—just as the music was stopping. Like their clients, they found themselves with too many people. Unlike them, they have operated under an odd recruiting system that has led them to commit to entering classes two years before they need them.

SLEEPLESS IN NEW YORK

Ouch: The New York firms were the only category that, year over year, slid in gross, RPL, and PPP. This has led to much brooding that essentially predicts the end of the lucrative New York market as lawyers have known it [see Losing Their Balance; subscription only]. Some of this has been served with a dash of schadenfreude.

If the end is near, and we have our doubts, it should be a marvelous farewell party. Twelve of the most profitable 20 firms are still headquartered in New York. And the other eight all have substantial New York offices. The immediate problem for these firms is what to do while they wait (and pray) for the return of the transactional and finance work that kept their corporate departments humming and bringing in various forms of bonus or success fees. There is little activity now, an empty inventory bin, and no appetite among the clients for paying above the rate card.

New York firms have divided on layoffs. Several of the most prominent have refused thus far, even as they are struggling to keep their lawyers busy. The decision in 2009 will be whether to carry those lawyers while hunting for substitutes to success fee arrangements.

THE DAYS OF THE LIVING DEAD

Once again, firms made more nonequity partners (NEP) than equity partners last year. That’s been the case each year since 1999 as firms have increased by three times the number of NEPs while increasing the number of equity partners only by almost a third. For most of the time, this strategy has benefited the owners: Since 1999, leverage went from 2.4:1 to last year’s 3.3:1. And all-partner comp–equity and income–grew by about 80 percent. But last year the comp calculus changed. For the first time since we began tracking nonequity partner statistics in 1994, average PPP went down while nonequity comp went up, albeit by a modest 1.3 percent. In other words, the owners got hit while their NEP mates got raises. That is a threat to what some equity partners view as the natural order.

These are only averages. There were, for instance, 27 firms where comp for both classes of partner fell, and 11 others where the owners got a boost while the NEP class took a cut. But the point is that this arithmetic will make some nonequity partners vulnerable.

And, absent an economic surge, there will surely be more cuts.

To test that theory, we ran a couple of simple calculations. Many observers predict a 10 percent drop in gross revenues in 2009. If that’s true, and all lawyer head counts were to remain flat, PPP in 2009 would fall by about $360,000, to $925,000. Alternatively, if you assume a 10 percent drop in gross, you can hold PPP steady, on average, by cutting a little more than 10 percent of the lawyers, 84 out of the average-size firm of 820. The cuts don’t have to be confined to a single category: lopping off 66 associates and 18 equity partners will hold the line for the survivors.

There will be blood–2008 was not the bottom, just the beginning.