Turn Out All Right?; Vote of No Confidence; Comp Expectations
Turn Out All Right?
“2023 could turn out all right, if law firms can collect on what they’re owed” concludes Citi’s Global Wealth at Work Law Firm Group after reviewing the results of Citi’s mid-year survey, polling 209 firms (85 Am Law 100 firms, 59 Second Hundred firms and 65 niche/boutique firms) (2023 Could Turn Out All Right, If Law Firms Can Collect on What They're Owed, Gloria Gomez-O’Rourke and Gretta Rusanow, 8/24/23, American Lawyer). Collecting may prove to be a tall-task, however; collection cycles have now lengthened for 6 quarters in a row, most recently by 4.7%, due to unbilled time from transactions taking longer to close (up 7.3%) and clients taking longer to pay (10.8% growth in accounts receivable). The good news is that inventory levels grew 8.9%, which could lead to overall revenue growth in 2023 if firms can collect it before year’s end.
Countercyclical practices such as litigation, labor employment, and bankruptcy saw significant increase in demand (hours worked) in Q2 2023 over Q2 2022 (Law Firm Financial Index Q2 2023 Executive Report “LFFI Report”, 8/7/23, Thomson Reuters). The spike in litigation in particular was able to offset the drop in M&A and other transactional practices, resulting in an overall 1.5% demand increase over Q2 2022 (LFFI Report).
Among law firm segments, Midsize firms saw the largest demand increase over Q2 2022 (3.7%), while the AmLaw 100 and Second Hundred saw modest gains of .3% and .2%, respectively (LFFI Report). Recent commentary has noted that despite the relative success of Midsize firms in growing demand each of the last two quarters, there have been a number of Midsize firm closures (Law Firm Closures Highlight a Tale of Two Markets (“Firm Closures”), Andrew Maloney, 8/25/23, American Lawyer). These closures demonstrate that there is a wide-range of individual firm performance within any law firm segment; and that Midsize firms may be more vulnerable to larger existential threats, such as minimal succession planning and reliance on too few clients or key partners (Firm Closures).
From a revenue perspective, the Second Hundred fared poorly, perhaps due to occupying a “no-man’s land” position on rates. Midsize firms were able to raise rates and still remain a bargain relative to the Second Hundred. And the AmLaw 100 has continued to grow revenue despite declining demand, by successfully implementing substantial rate increases (Law Firms Are Still Grasping for the ‘Other Side’ of Uncertainty, Andrew Maloney, 8/21/23, American Lawyer, citing Wells Fargo Private Bank Legal Specialty Group’s six-month survey, which revealed that the AmLaw 100 were able to raise rates 8.1%, compared to 5.5% among the Second Hundred).
Vote of No Confidence?
MLA released its lateral partner satisfaction survey in July, the first since 2020 (2023 Lateral Partner Satisfaction Survey “Survey”, Jon Lindsey and Ronald Wood, Major, Lindsey & Africa). Out of 1,128 respondents, 85% reported that they were very satisfied (55%) or somewhat satisfied (30%) with the firm they lateralled to. And 83% would move to the same firm again, if they had the opportunity to do it over.
“Lack of confidence in firm management/strategy” was the number one reason why partners left their prior firm (44% of respondents) (Survey; Vote of No Confidence: Partner Exits More Often Result From Strategy, Management Miscues, Andrew Maloney, 7/27/23, American Lawyer). Compensation was second at 39%, while “lack of support to build practice” was third at 38%. Although compensation was only the 6th most important factor cited by respondents in selecting a new firm, 71% of laterals received an increase in compensation in the three years since joining their new firm. Likely correlated, 75% of lateral partners increased their originations since joining their new firm.
Comp Expectations
Blane Prescott of MesaFive counsels law firms and serves on compensation committees throughout North America and Europe. He recently drafted an article for the American Lawyer where he discusses compensation philosophies, common compensation questions, and tips on managing compensation expectations (How to Manage Partner Compensation Expectations in a Challenging Year, Blane Prescott, 8/23/23, American Lawyer). Prescott regularly interviews individual comp committee members as part of his consultancy; he notes that there is often significant disagreement among committee members within the same firm on compensation philosophy and approach. One practical step a firm can take is to gather the partnership compensation committee early in the year and jointly develop answers to expected questions, to avoid rumors and conflicting messages.
