Biglaw, In-House Counsel, Partner Issues, Partner Profits

2013 Law Firm Performance: An Answer And A Question

Why are law firms hiring more lawyers during a time of weak demand, and what overlooked aspect of 2012 law firm performance could affect results in 2013?

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First things first: I’m heading back to the States for a couple of weeks in October, and Troutman Sanders and Miller Canfield have already asked me to take advantage of that visit by giving my “book talk” about The Curmudgeon’s Guide at those firms. That means I’ll be blowing the dust off my speaking notes and reminding myself what I say. I might as well get some bang for the dust; if you’d like me to give the book talk at your firm (or school) in early October, please let me know.

Second things second: Citi, Wells Fargo, and PeerMonitor recently released their analyses of law firm performance to date in 2013, and the pundits were all a-twitter. (Well, all a-blogger, anyway, but the pundits are so retro.)

Here’s one question the pundits posed: Why is law firm headcount up when law firms are suffering from decreased demand for their services?

That’s a pretty good question, and there’s no obvious explanation. Being a curious fellow, I used a clever technique to get to the bottom of this: I asked.

After the jump, I explain why firms are hiring more lawyers during a time of weak demand (as explained by senior partners at a couple of firms) and note an overlooked aspect of 2012 law firm performance that may affect results in 2013 . . . .

First, the answer to my question: Why is law firm headcount up while demand is down? According to the folks I met, law firms knew that they wanted to hire fewer people in 2012 and 2013, and they told their recruiting committees to reduce the number of offers extended to summer and new associates. The recruiting committees did as instructed. And then the market interfered: The rate at which applicants accepted job offers increased dramatically, more than offsetting the decreased number of offers extended. Presto! Increased headcount in a time of decreased demand.

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That may not be good for law firm profitability (on average), but at least it explains that firms weren’t acting irrationally.

Here’s another thing I heard during my chats with senior lawyers in private practice.

I noted back in January that December 2012 was an odd month for law firms. Everyone knew last December that income tax rates in the United States were going up in 2013. That gave law firms an even bigger than usual incentive to press for collections before year-end 2012. If the firms were successful, they’d accelerate income into 2012, thus reducing partners’ tax bills. But firms would also be robbing the till: High collections in December 2012 means lower collections in January and February 2013.

So while I was chatting with my senior-partner-chums, I asked about collections in December 2012. And I heard across the board (from all two of my informants) that December 2012 had been the highest month for collections in the history of their firms. (One of these fellows volunteered that he’d heard the same from partners at many other firms, so extraordinarily high collections in December 2012 may have been an industry-wide phenomenon.)

I don’t know whether Citi, Wells Fargo, PeerMonitor, and the bloggers have considered how law firm economic incentives in late 2012 may affect performance in 2013. Perhaps the pundits overlooked this factor, and law firms are poised to have a worse-than-projected 2013 (because firms looted their 2013 revenue pipelines). Or perhaps the data assembled by the banks already reflects decreased revenue in January and February (caused by accelerated collections in December 2012), and law firm performance will be slightly better than anticipated for the rest of the year as collections trend up from an artificially depressed start.

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I’m not drawing any conclusions here. That would be hard work. And, no matter what conclusions I drew, I’d surely offend some law firm or other. As you’ve surely noticed, I don’t offend law firms in this column — because I work for the world’s leading insurance broker for law firms, and I don’t need brokers with pitchforks gathering at my door.

Despite my public timidity, I’ll be curious to read — in the comments or elsewhere — how accelerated collections in late 2012 is expected to affect law firm performance in 2013.

Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.

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