Law firms that hope to succeed in the future need to embrace the shifting realities of the marketplace now, according to a new report that serves as the latest in a string of warnings that the legal sector will never return to its prerecession heyday.
Jointly produced by the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Peer Monitor, the report draws on a variety of other studies conducted over the past year on such subjects as partner compensation, law firm composition, and demand for lawyers to paint a portrait of an industry in flux.
Based on data culled from 135 firms in the Peer Monitor database, which tracks metrics such as demand, rates, productivity, and expenses, the report describes 2012 as "another year of only modest growth" that produced an average uptick in profits per partner of just 3.58 percent among the surveyed firms. Without breaking those firms into categories based on size or total revenue, the report notes that firms residing within the ranks of The Am Law 100 saw their profits rise just 2.45 percent in 2012, compared to the average 4 percent gain enjoyed by non-Am Law 100 firms.
The Georgetown report does not offer any conclusions about how the firms performed in terms of gross revenue last year. A recent study from Wells Fargo Private Bank's Legal Specialty Group, however, found that gross revenue rose 5 percent in 2012 among its survey of 100 firms, including more than 50 in The Am Law 100. The Wells survey found profits within that group rose 5 percent on average in 2012.
So far, several Am Law firms have exceeded those averages, according to The American Lawyer's early Am Law 100 reporting.
At Irell & Manella, for instance, preliminary numbers show the firm enjoying a 19 percent surge in profits, to $3.42 million per equity partner. Baker & Hostetler, meanwhile, saw its profits jump 10 percent, to $930,000. DLA Piper profits per partner rose a more modest 6.9 percent, to $1.3 million.
At the other end of the spectrum, several firms did see their profits slide last year, according to our early reporting. McDermott Will & Emery's profits dropped 2.7 percent, to $1.46 million, while Jenner & Block's slipped 3.6 percent, to $1.49 million.
The Georgetown–Peer Monitor study also found that demand for legal services increased just 0.5 percent last year, based on the number of billable hours logged by firms that report to Peer Monitor. Labor and employment lawyers saw the biggest increase in demand, 4.1 percent, while litigators' were off slightly and corporate lawyers racked up 1.2 percent more billable hours.
The number of lawyers in U.S. firms, however, increased by 2 percent in 2012, according to the report, contributing to what the authors call an overcapacity in the market.
Among the study's other findings:
•Though law firms laid off thousands of lawyers during the downturn, their productivity—as measured by hours logged per lawyer—remained relatively constant between 2009 and 2012.
•Billing rates rose an average of 3.4 percent in 2012, compared to an average annual increase of between 6 to 8 percent prior to the recession. During the past three years, firms increased their average standard rate from $464 to $507 per hour.
•Realization rates were 82.8 percent among Am Law 100 firms and 85 percent among Second Hundred firms in 2012—figures the report describes historic lows.
•Competition is increasing among firms, meaning "the only way (short of a merger) for a firm to capture market share is to take it from another firm."
Echoing the message embedded in a state-of-the-industry report issued by Citi Private Bank's Law Firm Group and Hildebrandt Consulting last month, the Georgetown–Peer Monitor reports says law firms will never revisit their prerecession heyday. In fact the report's authors even dismiss the success firms had in the decade prior to 2008, homing in on annual billing rate increases "that bore little relationship to what was going on in the broader economy" largely driving up profits.
"The cumulative impact of these increases over time," the report states, "created a trajectory that was simply unsustainable."
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Yet Another Warning for Law Firms That Major Change Is Afoot
The Am Law Daily
February 4, 2013
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Yan Leychkis
"Billing rates rose an average of 3.4 percent in 2012, from $464 per hour to $507". I guess it's true what they say about lawyers being horrible at math. $464 to $507 is an increase of $43 or 9.3%.
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jdreitler@ustrademarklawyer.com
Let's not forget that a number of the large AmLaw firms have increased their profits per partner by the trick de jour - ."de-partnering" productive partners in their 40's and early 50's who are not rainmakers. Makes the numbers look good for the "real" partners left standing. what does it do for morale? Or what does it say about loyalty to an organization?
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We the People
Major change also includes alimony reform. Members of the Bar should support this change as it is inevitable and in the public’s best interest. Lawyers remember your ethics. Do good, do not do harm.
If New Jersey is to be a progressive state then the Alimony Statutes should reflect 21st century norms.
The law needs to change and require mandatory arbitration and right to know information with every marriage certificate of the down side of a divorce proceeding, from the possibility of incarceration to realizing that you will not live in the manner you were accustomed too after your divorce and most importantly that the Superior Court Judge will become the manager of your family.
Bar members help us work through these changes, we need your help and support.
Concerned Citizen, I am.
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