2023 in Review; Legal Spend & Rates; Blackbox Compensation
2023 was a better year than 2022 on several key performance measures, according to Thomson Reuters and the Center on Ethics & the Legal Profession at Georgetown University Law Center (2024 Report on the State of the U.S. Legal Market “Report”, Jim Jones - Lead Author, 1/8/24) (analyzing data through Nov. 2023 from 179 US-based law firms, including 48 Am Law 100 firms, 49 Am Law Second Hundred firms, and 782 Midsize firms).
As expected, countercyclical practices outperformed transactional practices in demand growth.
By segment, the AmLaw 100 registered no demand growth, while the Second 100 saw modest growth (0.6%) and Midsize firms led the way with 2.4% growth. Relatedly, Midsize firms also saw the most associate headcount growth at 11.8%, likely in an effort to meet increased demand and also to seize the opportunity to acquire talent that might otherwise have been wooed by AmLaw firms in a more competitive lateral environment (Report, compared to 8.5% associate headcount growth among the Second Hundred and 1.7% among the AmLaw 100). This headcount growth resulted in slightly lower productivity for Midsize firms, offsetting their relative gains in demand growth (Report). The chart below shows the average daily hours logged in work-in-progress per lawyer among the three law firm segments over each of the last three years.
Legal Spend & Rates
Forty percent of General Counsel at companies with $1B+ in annual revenue expect their outside counsel spend to increase in 2024, while only 22% expect it to decrease (Report, utilizing Thomson Reuters Market Insights, which conducts annual interviews of approx. 2,500 legal buyers). The Report speculates that GCs are anticipating significant rate increases again in 2024, even if demand remains flat. Data reveals, however, that increases in worked rates among all three law firm segments in 2023 did not result in higher rates paid by clients over the course of the year.
The Report attributes this reduction in rates paid to:
law firm partners self-censoring and writing-off time before sending the bill (see also Even As Billing Rates Increase, Lack of Confidence in Fees and 'Subtle Psychology' May Lead to Less Profit, Andrew Maloney, 1/17/24, American Lawyer); and
legal departments re-allocating work toward lower cost providers (Big Law Has 'False Sense of Security' as Clients Depart for Midsized Firms, Hugo Guzman, 1/22/24, Corporate Counsel).
Blackbox Comp
In recent years, several firms have moved away from lockstep compensation, in order to retain highly-productive partners and attract rainmakers in the lateral market place (Law Firms Seek Flexibility in Revised Partner Comp Systems, Balancing Seniority With Productivity, Justin Henry, 12/28/23). In these firms, this move has widened the compensation spread between the highest and lowest compensated equity partners.
According to recent reporting, a highly profitable AmLaw 25 firm has decided to move toward a blackbox compensation model, in which equity partners will not know each other's compensation (In Partner Comp, Does Ignorance Equal Bliss? Firms Using the ‘Black Box’ Hope So, Justin Henry, 1/16/24, American Lawyer). This move can be viewed as an effort to veil from the partnership the hefty price tag of top lateral candidates and the related increased spread in equity compensation.
Internal transparency aside, the more profitable firms within the AmLaw 200 tend to veil their equity partner compensation spread from those outside the firm as well. Roughly half of the AmLaw 200 report their equity partner compensation spread to the American Lawyer as part of the annual AmLaw 200 survey data collection process; however, the overwhelming majority of the most profitable firms do not. In fact, when ranking firms by profit per equity partner (PPP), only 2 of the top 25 by PPP and only 11 of the Top 50 submitted equity partner compensation ratios in 2023.
