2021 Financials, Retention, Remote Work

Thomson Reuters’ 2022 Report on the State of the Legal Market showed that demand was up in 2021, worked rates increased, realization was high, and profit growth was strong but was tempered by significant increases in compensation and turnover (“State of the Legal Market,” Thomson Reuters and Georgetown Law Center, reporting results from 171 U.S.-based law firms, including 51 Am Law 100 firms, 55 Am Law Second Hundred firms, and 65 Midsize firms). Midsize firms led the way in profit growth at 22.4% (13.4% growth for AmLaw 100; 12.2% growth for AmLaw 200). This is likely due in part to slower expense growth at Midsize firms, who increased salaries in 2021 but not at the level of AmLaw firms participating in the salary wars (State of the Legal Market, AmLaw 100 - 15% increase in associate compensation, AmLaw 200 - 10%, and Midsize firms - 9.1%).

Practice Demand
All practices except bankruptcy showed positive year-over-year growth in demand in 2021, as measured by billable time. However, 2020 was an easier year to beat, based on the slow-down in the early months of the pandemic. Compared to 2019, only real estate, corporate, and M&A showed positive growth in 2021, but at such a high rate that overall demand growth in 2021 eclipsed 2019 by 1% (State of the Legal Market).

Rates
Billed rates grew at 3.9% through Nov. 2021 but fell short of 2020’s growth, largely due to a different mix of fee earners. In 2020, partners represented a greater share of billed time than usual, as clients sought strategic counsel due to the pandemic. Non-lawyers’ share of billed time also decreased substantially in 2020, but rebounded in 2021. The increase in both non-lawyers and associates’ share of billed time in 2021 resulted in relatively smaller rate growth, but an increase nonetheless. Realization was at 90.6%, the highest point since 2009 (State of the Legal Market).

Headcount & Productivity
Lawyer headcount also increased 3.9% in 2021, the highest increase in over a decade. This year-over-year increase reflected at least in part the shifting of entry-level start dates in Fall 2020 to the beginning of 2021. The increase in headcount offset the gains in demand growth, resulting in only minimal gains in productivity in 2021 (avg. daily demand per lawyer), compared to 2019. For perspective, hours billed per month in 2021 across all lawyers totaled 124, slightly more than the 5 yr avg. of 121, but substantially less than the pre-recession boom of 2007 (134 hrs. per month). At first glance, this does not mesh with the reported burn-out and turnover in 2021 among associates. But disaggregating the data reveals that the drop in monthly hours from the 2007-high are largely at the non-equity and equity levels. In 2007, associates, non-equity partners, and equity partners billed roughly the same (130s per month); in 2021, associates billed in the 130s, equity partners in the 120s, and non-equity in the 110s; and associates in corporate, M&A, and real estate likely averaged much more (State of the Legal Market).

Retention
One partner estimates that their firm lost 15 to 20% of the revenue they could have generated in 2021 due to turnover (How Law Firms Looked for an Edge in 2021’s Talent Wars, Dylan Jackson, 12/23/21, American Lawyer). Some commentators predict that profit and bonus pool allocation will be especially critical in partner retention this year, as two years of largely remote working have eroded cultural bonds and the stress of the pandemic has led to burn-out (With Profits and Hours Rising, the Stakes are High for Equity Partner Comp Allocations, Dan Packel, 12/7/21, American Lawyer).

Associate turnover stood at 23.2% through November 2021, the highest total in years, despite compensation rising by 11.3% over the same period (Associate Turnover Costs Temper Expectations After ‘Extraordinary’ 2021, Andrew Maloney, 1/11/22, American Lawyer, citing State of the Market). It is worth asking how effective compensation increases are in retention. According to the American Lawyer’s 2021 Midlevel Associate Survey, 27% of the 3,700 respondents noted they would lateral for a compensation increase. 60% would consider leaving for better work-life balance (State of the Legal Market).

Thomson Reuters compared the quartile of firms with the lowest turnover rates (“Stay Firms”, 8.7% on avg. among all attorneys) to the quartile of firms with the highest turnover rates (“Go Firms”, 18.4% on avg. among all attorneys). Counter-intuitively, Stay Firms had relatively smaller associate compensation increases in 2021 (9.8%) than Go Firms (11.4%), and Stay Firm lawyers billed 51 hours more annually than Go Firms. Thomson Reuters commentators theorize that the relatively smaller size of Stay Firms (361 attorneys on avg.) is an advantage in creating “cultural glue,” over larger and potentially more dispersed Go Firms (514 attorneys on avg.).

Work allocation likely plays a role in retention as well, and firms are taking strides to improve work allocation models and to track the results (In Big Law’s Quest to Quell Associate Anxiety, Work Allocation is a Tipping Point, Jessie Yount, 12/16/21, American Lawyer).

Remote Work
The ability to work remotely is likely to affect retention going forward. Thomson Reuters reports that “the number of lawyers who now want to work remotely at least one day a week has doubled from pre-pandemic levels and is now at about 86% of lawyers” (State of the Market).

AmLaw 100 firm Quinn Emanuel announced in December that it intends to allow lawyers (including associates) to work from anywhere in the U.S. on a permanent basis, regardless of where the attorney is located (Quinn Emanuel to Let US Lawyers Work Remotely on Permanent Basis, Dan Packel, American Lawyer, 12/20/21). As of December, the firm had already hired 5 associates to work remotely and had a number of existing associates working remotely. The new hires must be affiliated with a Quinn Emanuel office and must comply with all applicable tax and bar rules (For framework for researching relevant bar rules and opinions, see article co-authored by North Carolina’s own Amy Richardson of Harris Wiltshire & Grannis, Avoiding Unauthorized Practice of Law in Remote Work, Lauren Snyder & Amy Richardson, Law360, 8/5/21).