Billable Hours, Law Firm Mergers, Small Law Firms

Size Matters: Small Firms Growing In This Economy

How are small law firms doing in a still-challenging economy? Better than you might expect, according to the results of a new survey.

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I have a friend who is looking for a job at a small law firm. (No, this is not one of those instances in which a person refers to herself as a “friend.” Do you see any quotation marks?) Not surprisingly, she is finding it difficult to land said job. As reported on Vault’s Law Blog, June was a particularly bad month when it came to legal unemployment.

My friend’s situation is not great. Of course, I did not say this to her. Indeed, like most conversations with my good friends, I say this behind her back instead. I am, after all, a good friend.

While things may not be looking so rosy for my friend as an aspiring small-firm lawyer, they are looking pretty sweet for some employed small-firm lawyers….

According to the Survey of Law Firm Economics (2011 Edition), conducted by ALM Legal Intelligence and The National Law Journal, average gross receipts and income per lawyer grew by an average of 14% for small firms last year. Furthermore, gross receipts and income per equity partner are up by 19% at small firms this year.

The Survey reported some additional notable trends:

Billable hours inched up, but have not returned to mid-2000 levels. Hourly rate increases were reported by small and large firms, but midsize firms have either not changed their rates or have lowered them slightly (-3%).

Firms are moving away from the billable hour. Some 95% of firms have reported billing via an arrangement not based solely on hourly rates. The majority (62%) have used alternative fee arrangements (AFAs) for up to 10% of their billings and the largest law firms in the survey (more than 150 attorneys) have used AFAs for between 11% and 25% of their total billing.

Compensation returned to levels that exceeded 2007 compensation amounts for the most senior partners and associates. For instance, median total compensation for 25-29th year Partners increased 8.2% from $322,813 to $349,300. Interestingly, for the fourth year in a row, average starting salaries for new graduates remained unchanged at $85,000. The biggest jump in total compensation for both partners and associates was seen at the largest law firms (150 or more attorneys).

Staffing continued to be an issue in 2010, with U.S. law firms reporting some of the lowest staffing ratios since the Survey of Law Firm Economics started trending the data in 1985. Ratios were about 70 associates to 100 partners in the early 2000s. After a 1.8% decrease in 2010, they’re now down to just 55 to 100.

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What is contributing to the revenue increase among small-firm lawyers? Neither the Survey nor Larry Bodine’s column discussed a cause for the increase in 2010. If this trend continues into 2011, however, one reason may be explained by a report released earlier this month.

The report, discussed on Law.com, found that small firm acquisitions were “the driver in an active second quarter of law firm mergers and acquisitions.” For example, twelve new combinations were announced from April 1 through June 30, putting the total number for the first two quarters of the year at 28, up 47 percent over the same period in 2010. Ten of those 12 deals involved acquisitions of firms with 20 or fewer lawyers and the other two involved acquisitions of firms with fewer than 50. Seven out of the twelve acquiring firms had less than 200 lawyers.

Some of the most prominent mergers include:

• In April Kelley Drye & Warren announced the acquisition of 15-lawyer Los Angeles entertainment boutique White O’Connor Fink & Brenner.

• That same month, Womble Carlyle Sandridge & Rice, in Winston-Salem, N.C., announced that it acquired 44-lawyer Buist Moore Smythe McGee, one of the oldest and largest firms in Charleston, S.C.

• Also in April, Atlanta-based labor and employment firm Fisher & Phillips announced the acquisition of 19-lawyer Cleveland boutique Millisor + Nobil.

• In June, Blank Rome announced it was acquiring Abrams Scott & Bickley, a nine-lawyer litigation boutique based in Houston.

• Also in June, Saul Ewing announced the acquisition of Dionne & Gass, a seven-lawyer firm in Boston.

Why the uptick in small firm mergers? There are a few possible answers. One reason may be due to the fact that many mid-size firms have already been acquired. Another reason is that “[a] lot of smaller firms find themselves with aging leaders and rainmakers who are getting ready to retire. Being acquired can be a good succession plan for a firm in that situation.”

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So, in short, working in a small firm may be nice work if you can get it, and you can get it if you try (maybe).

When not writing about small law firms for Above the Law, Valerie Katz (not her real name) works at a small firm in Chicago. You can reach her by email at Valerie.L.Katz@gmail.com and follow her on Twitter at @ValerieLKatz.

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