Smaller But Mightier?; Return to Normal; Raiding the “Unranked”
Smaller But Mightier?
The American Lawyer released its annual AmLaw 200 survey last month, analyzing financial performance in 2022. The results were consistent with that seen in the AmLaw 100 a month before, namely the lower the AmLaw ranking, the better the performance in 2022. In fact, the Second Hundred outperformed the AmLaw 100 in revenue growth, revenue per lawyer, and profits per equity partner last year (Smaller but Mightier: The 2023 Am Law 200 Outperforms Larger Firms, Patrick Smith, 5/23/23, American Lawyer).
Return to Normal
Despite strong performance in 2022, the reign of the Second Hundred may have been short-lived, at least in terms of revenue growth. Survey data from Q1 2023 within the AmLaw 200 indicate that firms ranked 1-50 (“First Fifty”) are already back on top (Equity Partner Productivity Falls Most Amid Q1 Rises in Revenue, Dips in Demand, “Dips in Demand” 5/11/23, Gloria Gomez-O’Rourke & Mike McKenney, American Lawyer). Citi’s Global Wealth at Work Law Firm Group’s Quarterly Survey found that the First Fifty outperformed all other segments with 5.9% revenue growth in Q1 (Dips in Demand). Interestingly, the First Fifty’s success in Q1 was not due to increased demand for their services, but instead due to their ability to charge higher rates, as well as to collections on accounts receivable from 2022.
A. Demand
Thomson Reuters’ Law Firm Financial Index Report (LFFI) shows that Midsize firms continue to lead the way in demand growth in Q1 2023 (compared to Q1 2022), likely due to cost-conscious GC's shifting work, as well as to the slowdown in large M&A deals (LFFI Q1 2023 Executive Report, Thomson Reuters, 5/8/23, aggregating data from over 160 law firms).
Gretta Rusanow of Citibank Law Firm Group and Kent Zimmermann of the Zeughauser Group note that practice area mix likely played a role in the uneven results; generally, firms with relative weight in litigation fared better in 2022, while firms with relative weight in large transactions fared worse due to reduced deal flow and increased headcount at higher compensation from robust hiring during the frothy deal environment of 2021 & early 2022 (A Step Back, But Still Ahead? An Analysis of The 2023 Am Law 100, Patrick Smith, 4/18/23, The American Lawyer).
A breakdown of the AmLaw 100 by quartile supports this theory. Across several measures, the 4th Quartile (76-100) outperformed the others, while the 2nd Quartile (26-50) finished last.
Analysts in Wells Fargo’s Legal Group found a similar decline in demand of -1.5% among the AmLaw 100 firms it surveyed (Big Law Surprisingly ‘Strong’ so Far in 2023, but More Cuts Could Be on the Way, Andrew Maloney, 5/2/23, American Lawyer. And Citi’s Survey showed demand declines of -3.1% among firms ranked 1-50, and -.7% among firms ranked 51-100 (Dips in Demand).
B. Rates
Worked rate growth rose 7.2% for the AmLaw 100 in Q1 2023, the highest year over year increase in LFFI history (LFFI, noting 5.2% rate growth for the Second 100 and 4.9% for Midsize firms). Corporate legal departments are pushing back in two ways: 1) moving work (see Demand above) and 2) not paying legal bills promptly or in full (Are Second Hundred Firms the New 100?, Justin Henry, 5/23/23, American Lawyer).
C. Collections
Although firms were able to collect on A/R from 2022 in Q1 2023, the collection cycle grew by 4% (Dips in Demand). Further, the AmLaw 100 yielded a lower realization rate, partially offsetting their more robust rate increases (LFFI).
Raiding the “Unranked”
ALM Legal Intelligence published a report last month, analyzing over 3,600 lateral partner moves within the AmLaw 200 from Oct. 2021 to Sept. 2022 (Am Law 200 Partner Hires, Gina Passarella & Patrick Fuller). Among the conclusions was the unremarkable finding that AmLaw firms ranked 1-100 were responsible for 76% of the lateral partner hires of AmLaw 200 firms over that period, largely mirroring the relative distribution of partners within the AmLaw 200 (partners at AmLaw firms ranked 1-100 comprise 72% of total partners; partners at AmLaw firms ranked 101-200 comprise 28%).
What is more interesting is where those partners came from. While 27.4% came from AmLaw firms ranked 1-50 (which ALM classifies as “Tier 1”), 29% came from firms outside of the AmLaw 200 (“unranked firms”); in fact, unranked firms supplied more lateral partners to the AmLaw 200 than AmLaw Tiers 2-4 combined (firms ranked 51-100 supplied 14.6%; 101-150: 8.1%; and 151-200: 4.1%).
While Tier 1 firms targeted other Tier 1 firms for 42.6% of their partner hires, every other Tier hired more partners from unranked firms than any other Tier, or source.
***The AmLaw 76-100 likely saw less of a hit to Profits per Equity Partner (PEP) because these firms did not chase the compensation increases of firms in the upper tiers of the Am Law100. Interestingly, the AmLaw 26-49 saw the biggest drop in PEP by far, perhaps because they participated fully in the hiring frenzy, while also significantly increasing compensation of associates & non-equity partners, but ultimately lacked the same leverage to raise rates as the AmLaw 1-25.
Taking a broader view, the AmLaw 100 has done very well over the last 10 years. PEP increased 74% over that span and Profits per Lawyer increased 51.7%. Relatedly, Revenue per Lawyer increased 37.7% over the last decade, outpacing Cost per Lawyer growth (29.1%), despite significant increases in associate compensation. Although the AmLaw 100 saw a reduction in equity partners as a % of firm lawyers over that period (more on that below), most of the PEP growth is likely not the result of shrinking equity pools and is more likely attributed to rate increases, higher utilization, and improved operating efficiencies (The Long View: A 10-Year Look at Key Financial Metrics “The Long View”, Gina Passarella Cipriani, 4/18/23, The American Lawyer). As Patrick Fuller VP of ALM Intelligence summed it up: “This last three- to five-year stretch is the best three- to five-year stretch [for the AmLaw 100] in history…” (Some Lost, Much Gained: Thoughts on 2022 and What's to Come, Gina Passarella Cipriani, 4/18/23, The American Lawyer).
Non-Equity Growth
Despite the drop in profits in 2022, the Am Law 100 increased equity partner ranks by 1% in headcount over last year’s total (The Am Law 100 Shared More of the Wealth in 2022, but It Won't Last For Long, Andrew Maloney, 4/18/23, The American Lawyer). In fact, equity partner ranks have grown 6.7% over the last decade. However, total lawyer headcount among the AmLaw 100 has grown more rapidly than the equity tier. As a percentage of firm lawyers, equity partner ranks have experienced a steady decline over the last 10 years, ranging from highs of 21.9% in 2013 and 22% in 2014 to lows of 19.7% in 2021 and now 19% in 2022 (The Long View). In contrast, non-equity partners have experienced a steady increase as a percentage of firm lawyers, from 14.8% in 2013 to 17.4% in 2022.
If these trends continue, non-equity partners should overtake equity partners in headcount over the next few years (The Long View). The continued growth of non-equity partner classes may be sound strategy for the AmLaw 100: 1) promotions to non-equity partner can help firms to retain experienced attorneys whom clients have come to value; and 2) non-equity partners require no training, command higher billable rates, collect at higher realization rates, and turnover less than associates (Crazy Like A Fox - Why the Increase in Nonequity Partners (and Decrease in Associate Ranks) Makes Business Sense, Edwin B. Reeser and Patrick J. McKenna, 2/1/2012, The American Lawyer). And although non-equity partners earn more in compensation, associate compensation increases have narrowed that delta in recent years.
