Partner Rates + Cost-cutting + PPP Funds = Profit
Commentators are predicting that profits in 2020 will largely hold, with a majority of AmLaw firms finishing within 5% of their 2019 profit figures (For 2020, Revenue may Fall but Profitability is Largely Expected to Hold, Dan Packel, 9/20/2020, American Lawyer). Although there was a decline in hours billed in the 1st half, revenue grew 5.3%, due to rate growth (partner hours comprising greater % of hours billed) and a shorter collection cycle on Q1 inventory (Despite the Coronavirus, Law Firms Grew Revenue in the First Half, Jeff Grossman and Gretta Rusanow, 8/18/2020, American Lawyer) (sampling 196 firms surveyed by Citi Private Bank’s Law Firm Group). All segments did not perform equally, however. In the survey, AmLaw firms 1-50 outperformed others, with revenue increasing 7.1%, followed by AmLaw 51-100 (3.4%) and AmLaw 101-200 (1.4%); in contrast, non-AmLaw firms were down .4% in revenue.
Law firm profits will likely also be buoyed by pre-payment of 2020 expenses in late 2019 to offset strong 2019 revenue, as well as by PPP funds. According to NC Lawyers Weekly, 2,634 law firms in N.C. received PPP loans, retaining 14,829 jobs. Although most firms received less than $150K, 291 firms received between $150K and $5M (Quietly, PPP Loans Keeping Legal Profession Afloat, David Donovan, 7/30/2020, North Carolina Lawyers Weekly).
Law firms will likely continue to make adjustments to headcount and compensation. Although some firms have begun to partially restore across-the-board pay cuts and withholdings enacted in March/April, commentators expect targeted cost-cutting going-forward, as firms wrestle with keeping high-performers well-compensated and off the lateral market (More Cuts Coming as Firms Slim Down to Keep Partner Pockets Full, Dan Packel, 9/2/20, National Law Journal). These cuts will likely include reducing unneeded staff support made more apparent through remote working, as well as layoffs and targeted compensation reductions of associates and non-equity partners, and de-equitizing partners in lower-demand practices (Big Law Firms are Forcing out more Unproductive Partners as Recession Stalls Profits, Dylan Jackson, 8/21/20, American Lawyer).
In North Carolina, the Covid Recession appears to have hurt transactional practices and created some opportunity for litigation practices, despite moratoria on trials. The overwhelming majority of finance and corporate positions posted by N.C. law firms were posted before the shutdown, when the economy and deals were still flowing. By contrast, 64% of the litigation positions were posted after the shutdown. Real estate postings have split fairly evenly pre- and post-shutdown, which supports anecdotal observations that real estate practices in North Carolina have not been hit as hard as practices in larger markets.
