The book that everyone’s talking about right now is Capital in the Twenty-First Century by French economist Thomas Piketty. In his bestselling, critically acclaimed, 600-page tome, Piketty documents and diagnoses the growth of income inequality in the United States and around the world.
What’s true for the global economy seems to be true for law firms as well. As we mentioned in Morning Docket, the American Lawyer just released the latest Am Law 100 rankings, the biggest rankings in the world of Biglaw. Here’s the key takeaway, captured in the magazine’s headline: “The Super Rich Get Richer.”
How rich are the “Super Rich” these days? Let’s peek at those profits per partner….
- Total revenue: $77.4 billion, up by more than 5 percent (a new record).
- Total headcount: 92,007 lawyers, also up by more than 5 percent.
- Average revenue per lawyer: $840,963, down 0.4 percent.
- Average profits per partner: $1.47 million, up by 0.2 percent.
Focusing on the key metrics of RPL and PPP — which were basically flat for 2013, and below the rate of inflation — this is a lackluster performance. In 2012, RPL grew by 2.6 percent and PPP grew by 4.2 percent. In 2011, RPL grew by 1.9 percent and PPP grew by 3 percent.
The averages conceal significant variation in firms’ fortunes, as noted by ALM editor in chief Aric Press:
Twenty-five firms saw their RPLs drop. Forty-six firms shed lawyers. On profits per partner, 32 firms had dips, even as 50 cut the number of their partners who had equity status. It’s a fair leap to conclude that if fewer firms had reduced their equity partner ranks, even more firms would have suffered PPP drops. Cutting partners tends not to be a growth strategy, except on paper.
That’s a key point to note. When associates complain about bonuses stagnating while PPP figures reach “record highs,” higher even than before the Great Recession, that can be a bit misleading. For many firms, that nominal PPP growth has been achieved by slashing the number of equity partners.
But a few firms are being cheap on bonuses. These firms are doing better than ever, without resorting to de-equitization and other tricks. Am Law calls these firms the “Super Rich”:
[T]he Super Rich firms — the 20 with PPP of at least $2 million and RPL of at least $1 million — outperformed the financial averages by four or five percentage points while holding head count growth to a mere 1 percent. Average partner profits hovered at $3 million; average RPL at $1.2 million. These firms house 18 percent of the lawyers in The Am Law 100 and earn 26 percent of the fees.
The Super Rich firms got richer, while what Am Law calls the “Giant Alternatives” — the six enormous global Swiss Vereins — stumbled. On average, their RPL dropped by 4.7 percent, their PPP dropped by 8.2 percent, and yet they still added lawyers, increasing headcount by 31 percent. These firms are huge but not hugely profitable: although they house almost 20 percent of the Am Law 100′s lawyers, they generate less than 14 percent of the revenue.
(And some question whether vereins really should be considered single firms for the purposes of rankings like the Am Law 100. See our prior story, Be Afraid, Be Verein Afraid.)
Subtracting out the Super Rich and the vereins leaves you with, well, Everyone Else — what you might think of as the median or archetypal Am Law 100 firm. Their performance fell somewhere in between the thriving Super Rich and the troubled vereins:
For the 74 others in The Am Law 100, the Everyone Else group, 2013 was a year of modest, hard-won gains. Gross revenue increased by 2.2 percent, to an average of $631.3 million. RPL was up by 1 percent, to an average of $803,839. And PPP and head count both increased by 1.2 percent to $1.2 million and 785, respectively.
This seems like a continuation of last year’s pattern of “slow growth.” Some of the PPP gains were due to shrinking the equity partner ranks and also all the cost-cutting we covered last year, through moves like staff layoffs and buyouts. But now that firms have grabbed the low-hanging fruit, what else can they do going forward to improve their bottom lines? If overall demand for legal services doesn’t pick up in 2014, it seems doubtful that even modest profit growth can be sustained.
Now, what you’ve all been waiting for: the top firms by gross revenue, revenue per lawyer, and profits per partner….