Biglaw, Money, Partner Issues, Partner Profits, Wells Fargo

From the Department of Pleasant Surprises: Biglaw’s Solid Performance in 2012

It’s hard to get a good read on the direction of the economy these days. And the same could be said about the direction of Biglaw.

It seems that every week brings a new survey, report, or set of predictions. And they often point in different directions. Sometimes they are pessimistic, claiming that layoffs (including partner layoffs) are just around the corner. Sometimes they are positive, noting that despite the challenging economy, legal spending is up. And sometimes they fall somewhere in between.

Today brings news about past performance — which, while not a guarantee of future performance, can sometimes offer hints. It’s about how large law firms fared in the year just ended. And it’s good news….

It’s based on preliminary data from Wells Fargo Private Bank’s Legal Specialty Group. Wells Fargo, along with Citigroup, is one of the biggest lenders to law firms, so they have a good idea of who’s the next Dewey aggregate industry performance. Here’s a summary of their findings, from the WSJ Law Blog (sub. req.):

Law firm prospects appear to have bucked up in 2012, bringing numbers that, on average, were better than what Wells Fargo has seen in the past few years since the recession.

“This came as a complete surprise,” [Jeff] Grossman, national managing director for the group, told Law Blog on Monday.

Some highlights:

– 5% increase in gross law firm revenues, compared to 2011
– Net income was up nearly 6%
– Profits per equity partner increased by nearly 5%

Those numbers are well above what we’ve seen in the 2008-2012 period, and they’re worth celebrating. To quote a prior report, in the “New Normal” of Biglaw, “single-digit profit growth is good!”

If firms can repeat this performance in 2013, they will handily beat the overall economy (assuming economics are correct in predicting growth of around 2 to 3 percent). Who says lawyers are terrible businesspeople?

More surprising news from the report:

Another interesting trend: a split between the respondents from the top 100-grossing firms as ranked by American Lawyer, compared to those a bit further down the ladder in what law wonks call the AmLaw Second Hundred.

“The AmLaw Second Hundred outperformed the First Hundred,” Mr. Grossman said, adding that usually the reverse happens.

Here’s a breakdown:

(Big caveat, though: “survey respondents did not include the elite, top-grossing New York firms that typically leave the rest of the country in the dust.” And it seems those firms fared well in 2012, at least based on the improved bonuses they doled out this year.)

So 2012 was a good year for Biglaw (and we’ll learn just how good, on a firm-by-firm basis, as the American Lawyer releases its Am Law 100 figures). But let’s not get ahead of ourselves. The report raises questions as well as answers them. Here are some thoughts that law firm partner turned legal consultant Edwin Reeser shared with us:

[W]e need to temper our enthusiasm with prudent confirmation…. The prelim report is totally lacking in how and why it was a good year. Speculation as to strong collections. Hmmm. When realization rates were at incredible low levels through the first three quarters. Gross revenue numbers that look good. But how much of that is from lateral hires and combinations and how much is organic or internal growth? What metrics are being used is not revealed. Is it apples to apples? Or are there shrinking profit pools that delivered higher PPEP because there were ejections from the partner ranks at a faster rate than the pools diminished? Were costs pushed into next year? Were collections this year really good… and if so, to what extent was there an acceleration of income into 2012 that will compromise 2013 results?

That’s certainly an issue. As noted in the WSJ piece, “the looming fiscal cliff could also have ramped up the stakes…. because firms looking to protect their top-earning lawyers from anticipated tax hikes on the wealthy in 2013 may have been extra motivated to get cash in hand before year’s end.”

Back to Ed Reeser:

There is a US Marines saying that is relevant here: “In ten years nobody will remember the details of caliber, stance, or tactics. They will only remember who lived.” The same is true of surveys, whether they be optimistic or pessimistic, and of the law firms giving the data. The validity of this Wells Fargo survey will be better revealed when the underlying data is confirmed, and we have other reports. This ‘surprise’ has to be corroborated by the other players (Citibank, Hildebrandt, Am Law) or there is some anomaly at work… and which ones are correct and which ones are not is presently unknown.

We shall have to wait and see just a little bit longer to see if this is light at the end of a dark tunnel…. or high caliber muzzle flash to be followed with a heavy impact. Watch with interest, but keep your head down.

We’re watching with keen interest, that’s for certain. And so are our readers, from staffers to associates to partners. Whether all those layoff predictions come to pass will depend in large part upon firm performance.

P.S. You can get more of Reeser’s candid insights here.

2012: It Was a Very Good Year (For Law Firm Revenues) [WSJ Law Blog (sub. req.) via Morning Docket]
2012 wasn’t such a bad year for law firms after all; survey findings ‘a complete surprise’ [ABA Journal]
Offering Buyouts, Blank Rome Looks to Trim Secretarial Ranks [Legal Intelligencer (reg. req.) via ABA Journal]
Reeser Law Firm Documents [JD Supra]

Earlier: Quote of the Day: Pink Slips Are Coming To A Firm Near You!
Biglaw: Welcome to the New Normal
New Data on Hours, Billing Rates, and Corporate Legal Spending
Nationwide Layoff Watch: Partners in Peril
In Praise of Partners’ Prudence: Why the Lack of Spring Bonuses May Have Been a Good Thing

(hidden for your protection)

comments sponsored by

Show all comments