Rising Revenue, Talent Wars, & Rate Hikes

Revenue at law firms was up 14% through the first three quarters of 2021, compared to the same period in 2020, according to Wells Fargo Legal Specialty Group’s Check-in Survey (Capitalizing on 'Best of All Worlds Environment,' Law Firms Largely See Revenues Rise Through Third Quarter, Brenda Sapino Jeffreys, 6/15/21, American Lawyer).  WF Legal Specialty Group credited a “‘best of all worlds’ environment with almost everything going right: growth in demand, rates, and productivity.”  Although 93% of the 120 survey respondents experienced revenue growth, the AmLaw 50 registered the most at 17%.  Relatedly, hours billed were up 9% for the AmLaw 50, compared to just 3% for the rest of the AmLaw 200.

On the expense side, associate salary increases contributed to 11.5% growth in compensation outlays (Capitalizing on 'Best of All Worlds Environment’).  Thomson Reuters' Peer Monitor Index (surveying 160 major law firms) reported 7.2% growth in direct expenses over the last 12 months, which it also credited to associate compensation increases, since lawyer headcount increased only 2.3% over the same period (Peer Monitor Index Q3 2021 Executive Summary, 11/8/21, Thomson Reuters).

Speaking of headcount, associate comp increases were not sufficient to prevent a turnover rate of 13.8% over the last 12 months (Law Firm Profit Metrics Still High, but Talent War 'Boiling Point' Nears, Andrew Maloney, 11/8/21, American Lawyer).   Thomson Reuters analyst Bill Josten questions whether firms throughout the AmLaw 200 and beyond can continue to keep up with market leaders on compensation; he predicts further consolidations through mergers down the road, as some firms find themselves in financial straits due to associate comp increases, and others are forced to combine to be able to staff matters.   Consultant Kent Zimmermann also predicts more mergers due to the talent wars, as firms are not able to find the talent quickly enough to grow substantially through lateral acquisitions (Lateral Hiring Is Becoming So Competitive That Big Law Firms Are Seeking Mergers Instead, Dylan Jackson, 10/28/21, American Lawyer).

Talent War Fall-out
Speaking of Talent Wars, some firms are considering measures to hide their associates from competitors, including removing bios from the firm website, paying bonuses to associates to allow the firm to manage their LinkedIn accounts, and discouraging associates from attending bar association and networking events (As the Talent War Stokes Paranoia About Exits, Law Firms Employ Risky Retention Strategies, Lizzy McLellan, 11/9/21, Law.com). Reportedly, some firms are also monitoring traffic on firm bio pages for an unusually high number of hits from potential suitors.

In a recent survey of non-attorney professionals responsible for running their firm’s business operations, the top 3 “high risks” to profitability identified were 1) lawyer recruitment and retention, 2) poaching of staff by competitors, and 3) associate salary increases.  In last year’s survey, concerns over talent did not even make the top five (Despite Talent Issues Worrying Big Law Business Leaders, They Remain Confident About the Future, Andrew Maloney, 11/16/21, American Lawyer) (55 respondents from law firms with more than 50 lawyers participated in survey).

Rate Hikes
Rates have increased 6.5% in 2021 for the AmLaw 100 and 4% for the AmLaw 200 (Capitalizing on 'Best of All Worlds Environment’).  Realization through the first half of 2021 is at 97%, the highest since 2009.  Demand is still surging.  Associate compensation hikes have increased expenses.  Larger classes of new partners will increase costs or dilute profits, depending on their equity status.  And the annual inflation rate is at its highest level in 30 years.  For all of these reasons, industry insiders believe a large number of firms will seek to increase rates in the 5-10% range in 2022 (‘Aggressive' Rate Hikes Expected in 2022 as Demand Surges and Supply Lags, Dan Packel, 11/3/21, American Lawyer).  Firms leaders are expected to sell the rate increases internally and externally by arguing that the increases are necessary to attract and retain talent to better serve firm clients (Will Rate Hikes Put Trusted Adviser Relationships at Risk?, Dan Packel, 11/17/21, American Lawyer).