Separation Between Big Law Elites and the Rest Is Intensifying

In Big Law, which was already showing obvious stratification in recent years, the elite and most profitable firms have pulled even further ahead in a dynamic only exacerbated by the pandemic.

The residual effects of consolidation at the top of the industry can be seen in the current environment: the increasingly exorbitant arms race for talent, several-hundred-lawyer firms looking to quickly scale up through combinations, increasingly disparate financial outcomes, and constant rate increases at the leading firms while other firms face rate pressure.

“The top of the market is pulling away, capturing even more of the most price-insensitive work in the process,” Altman Weil consultant Jim Cotterman said.

Their market share, paired with the efficiencies of remote work, accelerated revenue growth for this group, he explained, and helped the same firms fund salary bumps and big bonuses for the best and brightest young lawyers. Meanwhile, the next tier of firms can’t hire quickly enough to keep up with attrition, and has actually found it challenging to meet clients’ needs.

“The basic rule is that what you can pay for talent is dependent on what you can charge clients for that talent. That rule is an advantage for the elite firms and a limiting factor for most everyone else,” Cotterman added.

The pandemic has appeared to only widen the gap. Much like in previous recessions, clients looked to elite firms as the “safer” option and increasingly funneled their work to them without shopping around. And the advantage elite firms have in recruiting talent only becomes more acute, as demand has rapidly risen throughout the year.

“This growth and segmentation between the Am Law 50 and the rest of the market was happening long before the pandemic. I think the pandemic has only exacerbated that differential,” Wells Fargo senior director Joseph Mendola said.

Compounding Growth

Over the past several years, firms at the top of the pile have gobbled up an increasing amount of market share through laterals and acquisitions.

In fiscal year 2015, Norton Rose Fulbright was the 10th largest U.S. firm by gross revenue, with $1.73 billion, according to data from ALM Intelligence. At the top of the list that year was Latham & Watkins, which pulled in $2.65 billion in revenue. The difference between the top-ranked Am Law 100 firm and the 10th-ranked Am Law 100 firm was about $920 million in revenue.

Last year, the price of admission to the Am Law 10 was about $2.23 billion in gross revenue, which is where No. 10 Jones Day landed. And Kirkland & Ellis, perched at the top of the Am Law rankings, saw $4.83 billion in revenue—a nearly $2.6 billion difference in revenue.

Am Law 50 firms have been cannibalizing an increasing share of revenue among the Am Law 200 since the turn of the century. Firms with greater scale and a broader base of revenue are the beneficiaries of compounding.

In 2000, the Am Law 50 accounted for 52% of the total revenue of the Am Law 200. In 2020, the top 50 firms made up 62% of the Am Law 200′s revenue, while the rest of the 150 firms accounted for 38%.

This scale, along with high-end practices, brings better outcomes in the lateral market, which has become particularly crucial this year, as demand soars and firms urgently staff up. This year, top Am Law 100 firms have been first to move on compensation and are increasingly raising the stakes, and that’s fueled by rate hikes that only the elite can command.

“I’m not totally sure how smaller firms will make adjustments because there just aren’t enough bodies, and the bodies that exist are able to go to Am Law 10 firms,” Kate Reder Sheikh, a managing director at Major, Lindsey & Africa who specializes in associate placements, told last week.

Industry observers note that there is no end in sight for this competitive talent market. Each round of special bonuses or pay bumps by a leading firm re-aggravates the market. Some firms, citing too few attorneys, are already turning away work in a glut in demand and potentially leave millions of dollars on the table.

It is no surprise, then, that some large firms of up to 600 attorneys are considering mergers.

Big Law has seen several combinations in the past few years that welded two Am Law 200 firms into a combined firm that debuted or moved up in the Am Law 50. The most recent to close was 1,159-attorney Holland & Knight and 252-attorney Thompson & Knight.

“We don’t see as much pressure among the Am Law 50. They’re more able to grow laterally, grow organically so they tend to be less focused on mergers. You have firms that are 500 lawyers, 600 lawyers who feel kind of midsized,” said Lisa Smith, a principal at Fairfax Associates.

Of course, being an “elite” firm isn’t only about size. Many consultants see revenue per lawyer (RPL) and profits per equity partner (PEP) as more accurate measures of a firm’s performance.

“Size isn’t the aim. It is more about depth of practice, breadth of geography. When we look at the driver of profitability, it really is driven by RPL. The way you get to higher RPL is getting practices that are well known by being able to offer a range of services to clients,” Smith said.

Cahill, Gordon & Reindel, for example, was ranked No. 91 in this year’s Am Law 200 rankings with $444 million in revenue. But when reordered by profits per partner, Cahill is ranked No. 9. But that is the exception more than the rule. When looking at the top ranked firms by PEP, only four are outside of the Am Law 50, suggesting that scale often begets profitability.

The Am Law 50 has grown its collective RPL by 90% between 2000 and 2020, from $597,188 to $1,136,849, according to ALM Intelligence data.

For the same time period, the data also shows, Am Law 51-200 firms grew RPL just by 75%, from $450,020 to $790,059.

The Pandemic’s Role

Observers have noted and data has illustrated that the pandemic has only exacerbated the divide.

Brad Hildebrandt, chairman of Hildebrandt Consulting, said that the pandemic’s effect on financial outcomes tracks that of previous recessions: clients stop shopping around and turn to “safe” elite firms during a downturn followed by a whiplash in demand that sends the cost of talent soaring. The next tier of law firms, which pull recruitment and retention levers as easily, lose out on both business and the talent they have invested in.

“I’ve lived through five or six recessions and it has happened every time. The law profession generally hurts less than others and it rebounds faster,” Hildebrandt said.

Toward the tail end of 2020, Am Law 50 firms were the only segment of the market to see a positive uptick in demand and they ultimately grew revenue by roughly twice that of the rest of the firms surveyed by Wells Fargo Private Bank.

That played into year-end results: Am Law 50 firms saw a 6.6% jump in RPL last year, while the rest of the Am Law 200 saw a 2.1% increase.

According to preliminary data over the first nine months of the year, Am Law 50 firms have seen a 6.2% increase in revenue and a more than 9% increase in demand. Firms in the Second Hundred, on the other hand, are seeing a 3.2% increase in revenue and a 3.4% increase in demand.

Hildebrandt also notes that not all smaller firms feel threatened by the consolidation at the top. Those with strong regional practices outside of major markets don’t necessarily feel the pressure that others do.

But for firms that are non-specialized and reside in major markets like New York, Hildebrandt does not see any relief coming soon, especially as costs climb next year when law firms go back into the office and people resume more travel.

2022 is shaping up to be interesting with the caveat of the talent problems, increasing costs of staff and associates coupled with increasing demand is going to continue for some time,” he said.

Zubair Q Britania

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