The American Lawyer reports that law firm demand in 2018 was the highest on record since 2011, according to a recent report by Thomson Reuters. Further amplifying evidence that law firms, especially the largest, reached new financials highs in 2018. Another report, conducted by Citi Private Bank’s Law Firm Group, found that revenue growth was up 6.4 percent at the 191 firms surveyed by the bank. And in the last two weeks, Wells Fargo reported average law firm revenue growth at 5.9 percent and average net income growth at 7.6 percent, the strongest numbers since before the Great Recession.
Thompson Reuters report specifically revealed that law firm demand, billing rates and lawyer productivity all rose during the year. According to the analysis, demand, measured as the number of hours billed, rose 1 percent for the year among all firms. Among the Am Law 100 firms, that number was 2.8 percent. Am Law Second Hundred firms and midsize firms saw demand growth in 2018 of 0.4 percent and 0.2 percent, respectively. The Am Law 100 was the only segment of firms that saw demand growth in all four quarters of the year, the report found, (as quoted in The American Lawyer).
Fortunately for smaller firms, rate growth was more evenly distributed, the report notes. The Am Law 100 saw rates grow 3.8 percent in 2018, compared to 2.9 percent for firms in the Second Hundred and midsize categories. The report also notes that Am Law 100 firms were the only segment of firms to show positive full-year growth in productivity, which measures hours worked per lawyer. The 100 largest firms by revenue grew productivity in 2018 by 0.8 percent, while that figure was flat at Second Hundred and midsize firms, (as quoted in The American Lawyer).
Mike Abbott, a Thomson Reuters vice president for enterprise thought leadership and content strategy, said that while 2018 was a banner year for law firms— especially the nation’s largest—there remains uncertainty around 2019, especially after the fourth quarter was somewhat softer than earlier quarters. “Whether the tailwinds will continue in 2019 remains to be seen, as client rate pressure and a shifting competitive landscape for legal services continue to pose challenges,” Abbott said in a statement. “And while the entire market was improved in 2018, we saw an increasingly segmented market where the very largest firms gathered the lion’s share of the gains last year.”
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The American Lawyer reports that according to recent data released by Vault and MCCA, minorities and female lawyers are making gains in overall representation at the nation’s largest firms. According to the Vault/MCCA Law Firm Diversity Survey, female attorneys represented more than 46 percent of law firm associates and 23 percent of all partners, and for the first time in the 14 years of data collection, the percentage of women equity partners exceeded 20 percent.
Law firms also brought in more female partners as laterals than they have in the past: 28 percent of lateral partners hired in 2017 were women, compared to 24 percent in 2016. And even though women are better represented in the non-equity ranks, many of the new female partners are equity partners. Women represented 29 percent of all new equity partners in 2017, a figure higher than any previous year. The rising number of female partners can be attributed to increases in both lateral hiring and promotions, the report revealed.
Minority representation is growing at all levels, from associates to partners to those in positions of leadership, the survey notes. Since 2007, representation of minority lawyers among law firm partners has grown three percentage points, from 6 percent to 9 percent. Attorneys of color now represent 25 percent of associates and 13 percent of counsel. More than 9 percent of attorneys who serve on management or executive committees are minorities. These figures are all higher than those reported in previous years. Nevertheless, lawyers of color are still much less likely to be partners than white lawyers: 46 percent of white attorneys are partners, compared to 24 percent of minority attorneys, (as quoted in The American Lawyer).
Additionally, the report found that law firms are recruiting more lawyers and law students of color, and women make up the majority of these new hires. Among new attorneys hired in 2017, 26 percent were people of color. Approximately 32 percent of the 2017 summer class were minorities, which is a percentage point higher than the year before and six points higher than 2007. Women also hold more leadership positions than they have in the past, serving in increasing numbers on law firm executive committees, as heads of office and practice leaders, the report notes. Almost 24 percent of management committee members are female, as are 24 percent of attorneys leading practice departments and 21 percent of U.S. office heads, (as quoted in The American Lawyer).
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The American Lawyer reports on several key trends for midsize law firms heading into 2019, according to a recent article featured in Am Law’s latest Mid-Market Report. In the article written by Alan Tarter, he provides his thoughts on industry trends affecting mid-size law firms in the coming year based on his many years of experience as a managing partner and practicing lawyer. These trends include a heightened focus on cybersecurity, continued lateral acquisitions, cost-effective specialization, providing innovative programming to all team members, and greater collaboration between large and small firms.
According to the article, Tarter notes that midsize law firms, like their brethren at large firms, will continue to put an increased focus on mitigation of cyber risk through enhanced security, protocols and more sophisticated risk management. We will see greater use of outside risk management consultants working directly with mid- size firms to address new risks and gaps on coverages. In addition, competition for the best candidates has increased, so midsize firms will need to be even more creative in their offerings. Midsize firms will need to better exploit their value propositions to clients in order to attract laterals from larger firms, Tarter adds.
Tarter notes that an added value proposition of full-service, midsize firms is that they are able to fill in the gaps in the specialized legal needs of both larger firms and smaller firms. According to Tarter, larger clients will continue to gravitate to midsize firms for certain types of work. “Midsize firms are in a unique position to provide more cost-effective, efficient services in matters not requiring large firm infrastructures. For example, midsize firms may be in a better position to provide more cost- effective services in specialized areas such as construction law, office space leasing or IP prosecution where larger teams and multiple offices are typically not necessary. In-house clients are becoming aware of the advantages of using midsize law firms for legal work like this,” explains Tarter.
Tarter adds that midsize firms have a unique opportunity to lead the industry in developing innovative programming to enhance the professional development of employees. These types of programs will help midsize firms stand out from their competitors, and will aid in attracting and retaining employees. These programs should place a greater emphasis on the longer-term professional development of attorneys and other team members. With the goal of providing the most value-driven services to clients, firms of all sizes are also realizing the benefits of partnering with each other, Tarter notes. You will see greater collaboration between large firms and midsize firms in working on projects together where they can each do what they do best and provide better service to clients, (as quoted in The American Lawyer).
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The American Lawyer reports that as 2018 came to a close, it was on pace to become the busiest year ever for law firm mergers, surpassing a record set in 2017. According to a recent report by legal consultancy firm Fairfax Associates, last year’s tally of 72 completed mergers was the highest since 2001. The report revealed that the 72 mergers completed in the past year was up from 65 in 2017 and easily outpaced the historical average of 52 mergers per year from 2008 to 2017.
Within the U.S., New York, Florida, Pennsylvania, Texas, Missouri and California proved to be the most desirable locations for firms looking to grow through mergers. Nine New York firms were absorbed into larger firms, according to Fairfax, while there were six mergers involving smaller firms in Florida, five mergers apiece in Pennsylvania, Texas and Missouri, and four mergers in California, (as quoted in The American Lawyer).
Fairfax principal Lisa Smith notes that there continues to be a lot of interest in combinations that transcend national boundaries. According to Smith, the past year was also a busy one for international mergers, thanks in good measure to Dentons’ continuing eagerness to add on new units. The firm’s eight cross-border mergers completed in 2018 accounted for more than half of the 15 counted by Fairfax, (as quoted in The American Lawyer).
Other major completed cross-border combinations included Bryan Cave with Berwin Leighton Paisner in London, DLA Piper with Delacour in Denmark and with Noguera Larrain & Dulanto in Chile, Eversheds Sutherland with Dvorak Hager & Partners in Prague, and Littler Mendelson with Reliance in Belgium and with CLINT in the Netherlands, (as quoted in The American Lawyer).
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The American Lawyer reports the legal industry is poised to have its strongest annual performance in a decade, according to a recent report by Wells Fargo Private Bank’s legal specialty group. The report, drawn from a survey of 120 firms, found that revenue was up 7 percent industry-wide, buoyed by demand growth of 3.3 percent when compared to the same time period last year. The results, Wells Fargo said, “almost certainly assure that the industry will report its strongest annual performance in a decade.”
The report revealed revenue at the 50 largest firms grew by 8.2 percent, compared with 5.7 percent at firms ranked 51 to 100 and 2.3 percent for the Second Hundred firms. In addition to revenue growth, law firm demand increased 4.3 percent for Am Law 50 firms; rose 2.5 percent for Am Law 50-100 firms; and dipped 0.2 percent for the Second Hundred. Firms also reported strong increases in profitability, with income to equity partners up 7.7 percent from a year ago at the same time. That is partly driven by shrinking partner head count. The survey noted a 3.5 percent decline in equity partner full- time equivalents in 2018, with 75 percent of firms reporting a decline in partner head count, (as quoted in The American Lawyer).
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The American Lawyer reports that law firm profitability is at a record high, according to a recent report released by ALM Intelligence. The report revealed that the average equity partner, at an Am Law 200 firm, received $1.8 million in profit sharing compensation last year. This is higher than any point in recorded history (the Am Law 200 data goes back to 1984). In addition, average profits per equity partner are nearly $500k dollars more, in nominal terms, than they were at the peak in profitability experienced before the past downturn. Even after adjusting for inflation, profits per equity partner are $125k per year more than they were a decade ago.
Given the myriad of obstacles law firms are currently facing, this raises an obvious question — how are law firms doing it? Director at ALM Legal Intelligence, Nicholas Bruch investigates, positing that there are four ways to increase firm wide profitability. The most straightforward path is to focus on increasing revenue per lawyer, notes Bruch. This can be achieved in several ways. Firms can increase worked hours by, for example, increasing hourly targets on associates. They can also increase utilization rates or realization rates. While these “levers” can boost a firm’s revenue per lawyer the most potent lever is rate increases. Increasing prices – which most often means increasing hourly rates – is the most rapid and straightforward path to increasing revenue per lawyer, (as quoted in The American Lawyer).
The next, most obvious, path to higher PPEP is to reduce costs. Again, there are multiple ways to accomplish this goal. According to Bruch, firms can reduce salary costs. This can be accomplished by cutting salaries or, more realistically, by shifting work to lower cost resources – either less skilled individuals or individuals who are based in lower cost locations. While these strategies have been pursued by some firms, Bruch notes that the more common route to lower costs has been to reduce both direct and indirect expenses, or more broadly speaking, “overhead”. Bruch adds that the last two paths to boost a firm’s profits per equity partner are to increase the firms’ leverage by either hiring more associates or by shifting the structure of the partnership to include more non-equity partners and fewer equity partners, (as quoted in The American Lawyer).
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The American Lawyer reports that law firm revenue growth in the first nine months of 2018 was the highest it’s been since 2007, and the outlook going forward remains positive. According to a new report, released by Citi Private Bank’s Law Group, overall revenue grew by 6.3 percent and demand was up 2.5 percent during the first nine months of 2018 compared to the same period in 2017. Many firms showed wider profit margins as a result of demand and billing rates grew at a level that outpaced an increase in expenses, the report revealed.
The Citi Private Bank’s report found that among the Am Law segments, size mattered, with Am Law 50 firms outperforming the other market segments in both lawyer rates and demand. Smaller, niche firms saw the greatest growth in revenue at 7.8 percent, and the second-greatest growth in demand at 2.5 percent. Looking at firms by geographic reach, the report revealed that global and international firms posted stronger revenue, demand and rate growth than national and regional firms, (as quoted in The American Lawyer).
“More than likely, this will be a year of strong top-line growth for the industry, but also characterized by expense pressure and continued dispersion among market segments,” notes Gretta Rusanow, research co-author and head of Citi Bank’s advisory services. “As firms end 2018 and look forward to 2019, it will be even more important to ensure that continued growth is profitable, particularly as this extended period of growth points to a looming downturn at some stage. Further, while our dispersion results show that some firms are enjoying even greater success than the average results of 2018 are showing, it also suggests that some firms are struggling mightily. We would expect this phenomenon to lead to further and perhaps accelerated consolidation ahead,” she adds.
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When it comes to law firm performance, does alignment matter? A recent article by The American Lawyer investigates, positing that the answer is an emphatic yes. Deborah Farone, author of “Best Practices in Law Firm Marketing and Business Development” reports on the topic, citing that recent research demonstrates there is a strong correlation between a firm’s culture and its performance. According to Farone, firms that align their compensation and other recognition methods with their key goals and objectives, demonstrate a high degree of transparency and reinforce their vision with communications are more likely to demonstrate success than those that are merely average.
Alignment applies to large, multi-practice firms and small firms alike. So, how does a firm’s management begin to put alignment into place? According to the article, there are several tactics law firms can follow to begin the process. First, operational and marketing tactics should all be based on a well-defined and articulated strategy. Secondly, strategy must be communicated, up and down the organization. “Sharing strategy both with direct reports and throughout the organization leads to greater loyalty, a shared sense of purpose, and collaboration. The time spent communicating these decisions is an investment that pays off in multiples,” notes Farone.
Farone adds that C-suite members should have a role on the executive committee to provide input in the development of the firm’s strategy and vision. Not only will C- suite involvement build loyalty, these executives will be allies in plan implementation. Additionally, Farone suggests that compensation metrics should be transparent and reward those behaviors that a firm values. Consider rewarding not just for business development activity, but where there is collaboration across all practice areas, (as quoted in The American Lawyer).
During compensation time, Farone recommends looking at qualitative metrics for more than simply self-reporting. Consider asking partners not only to self-report, but to answer assessment questions, such as: “Over the past year, which partner outside of your practice, helped you build your practice the most?” Third-party recognition will give a more robust picture. Lastly, Farone declares that leaders of the firm, practice areas and committees should be those who emulate the values of the firm and further its strategic mission. Bad behavior that goes against firm policies and standards puts the firm at risk, erodes culture and communicates a message that the mission is not a serious one, (as quoted in The American Lawyer).
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Clients need outside counsel that can collaborate to solve their problems, but law firms’ increased specialization creates an unfortunate conflict, and many are leaving big money on the table as a result, The American Lawyer reports. Recent NALP plenary speaker Heidi Gardner notes that “when firms get collaboration right — that is, do complex work for clients that spans practices and offices within the firm — they earn higher margins, inspire greater client loyalty, gain access to more lucrative clients and attract more cutting-edge work.”
Gardner notes that even firms that have figured out how to use collaboration to provide the best service to clients—and get paid accordingly—aren’t optimizing collaboration across their portfolios. According to her estimation, at least 70 percent of large global law firms today include collaboration-related goals in their strategic plans. But many of these same firms lack a solid understanding of how collaboration is working across their portfolios and where the gaps are. Simply put, you can’t just state that collaboration matters and hope lawyers change their behavior. You need to set specific objectives, based on a deep understanding of your data and its implications, then hold people accountable for delivering, (as quoted in The American Lawyer).
According to Gardner, in order to effectively implement smart collaboration and deepen these high-value client relationships, you must figure out ways to unlock value that your firm can provide given how deeply embedded you are in the client’s current work. In the article, Gardner lays out data showing that cross-collaboration in law firms yields a level of benefit far greater than anything achieved in a silo. Specifically, Gardner suggests that firms should locate potentially big clients that are only getting served by one practice group and identify areas to expand into other groups that add value for the client. Strategically, she notes that “you want to focus on this high-worth portion of your portfolio simply because adding additional practice groups at this level is worth such a significant chunk of revenue.” Additionally, Gardner recommends pairing junior partners eager to collaborate with more experienced practice group leaders to help further develop collaborative skills across the firm.
See highlights from the full article on The American Lawyer.
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