Financial Performance; AI’s Impact on Big Law Economics; Influencing Origination Credit
The new AmLaw 100 survey was released last month, revealing that 2023 was a good year for many firms. Out of 100, only 10 posted revenue declines in 2023. Only 20 declined in profits per equity partner. And nearly three-quarters of Am Law 100 law firms raised the average compensation of all firm partners, equity and non-equity (Showcasing Resilience of the Industry, Am Law 100 Firms Turn in Strong 2023, Patrick Smith, 4/16/24, American Lawyer).
2024 appears to be off to a good start as well. Wells Fargo Legal Specialty Group reported 9.5% revenue growth in Q1 '24 compared to Q1 '23, among the sixty-four Am Law 100 firms and thirty-eight Second Hundred firms surveyed (Billing Rate Increases, Demand Gains Help Law Firms Double Their Revenue Growth in Q1 "Billing Rate Increases", Andrew Maloney, 5/1/24, American Lawyer). Among the 160 firms analyzed by Thomson Reuters' Law Firm Financial Index, demand (as measured by hours worked) was up 1.9% in Q1 '24 over Q1 '23, with litigation leading the way at 3.8% growth (Law Firm Financial Index Q1 2024 Executive Report “LFFI Report”, Thomson Reuters, 5/6/24).
Further driving revenue, worked rates (agreed-upon rates) grew 6.4% across all firm segments in Q1 '24, a record for the Law Firm Financial Index (LFFI Report); standard rates grew 9% (Billing Rate Increases).
AI's Impact on Big Law Economics
Law.com hosted a webinar earlier this month on the impact of AI on big law economics. Presenters shared a chart from a Stanford University report, showing that AI reduced time spent on and improved quality of contract drafting and complaint drafting, but not client memos (The AI Index 2024 Annual Report, Stanford University, April 2024).
Take-aways from the webinar include:
Firms will hire non-lawyer AI experts in increasingly greater numbers.
It would not be efficient or effective to rely on attorneys to master and implement AI.
The term non-lawyer will become less pejorative, as AI experts will be working collaboratively with attorneys to maximize AI use.
Firms should not try to develop their own AI systems, as tech companies are much better suited to make massive advancements.
AI will enhance productivity and reduce hours billed, likely lowering revenue at firms that continue to bill by the hour. Panelists anticipate firms moving to alternative fee arrangements based on outputs, instead of inputs.
Panelists predict that AI may reduce lateral partner movement because partners may become wedded to the particular AI technology at their current firm.
[Note: I suspect there could be increased lateral movement to firms that embrace AI, as partners recognize its advantages and seek platforms that maximize it.]
Influencing Origination Credit
A viral LinkedIn post by CLO Paul Grewal asked whether clients should influence which lawyers receive origination credit for the work that clients send to a firm. A number of in-house commenters responded that they at least inquire about the allocation of origination credit at law firms; some responded that they actively seek to influence, citing disparities in the awarding of origination credit to women and minorities. According to a 2019 Survey of over 70 law firms by Diversity Lab, only 50% of firm respondents at the time had in place a written process governing origination credit; and only 46% had in place a process to appeal origination credit.
In an American Lawyer article about Grewal's LinkedIn post, pricing consultant Jason Winmill of Argopoint minimized in-house counsels' interest in origination credits, noting "In-house counsel has many big problems. How their outside counsel divvies up their multi-million dollar pies isn’t one of them..." (Some Clients are Pushing for Transparency Surrounding Origination Credits, Abigail Adcox & Chris O'Malley, 4/29/24, The American Lawyer). Origination credit may not be at the forefront of an in-house counsel's mind when discussing law firm rates and fees with a pricing consultant, but Grewal's post indicates that in-house counsel are thinking about it and in some cases inquiring. Perhaps even more concerning to law firm management would be those in-house counsel who suggest to their primary law firm contacts that they switch firms to receive proper credit, which I have encountered when assisting partners in finding a new home.
