Peer to Peer Magazine

P E E R T O P E E R : I L T A ' S Q U A R T E R L Y M A G A Z I N E | S U M M E R 2 0 1 9 31 and well above the post-downturn average of 1.6%. The group grew revenue per lawyer, a key measure of law firm revenue earning efficiency, by 4.1%. This is the best year- on-year growth in that metric since 2007. Profitability also improved. Profit per lawyer and profit per equity partner increased by 3.8% and 6.7% respectively, well above the post downturn averages for both metrics. Taken together, these figures reveal that the 2018 fiscal year was Big Law's best since the 2008 downturn. Cue the campaign bottles to pop. There are big differences between firm performances While the fortunes of most law firms improved last year, performance across the Am Law 200 was not even. Stronger economic growth in the U.S., a buoyant deal market, and increases in litigation helped some firms' growth rates soar to record heights. For others these tailwinds transformed declining financials last year into modest growth this year. In the 2017 fiscal year, nearly half (46%) of the Am Law 200 grew slower than inflation, meaning they effectively shrank. In 2018, that figure declined significantly, but 29% of firms are smaller today, in real terms, than they were a year ago. Another quarter of the Am Law 200 saw tepid growth, increasing revenue by less than 2.5% in inflation-adjusted terms. Underperforming firms tended to be at the smaller and less profitable end of the Am Law group. The largest firms, those ranked in the top 25, grew revenue by 8.2% last year. In contrast the smallest firms, those ranked 175 to 200, grew by a quarter of that rate (2.3%). Similar patterns show up in other metrics. The largest firms far outpaced the smallest firms in revenue per lawyer growth, seeing increases of 5.7% versus 0.9%. In profitability, the "super rich," a term The American Lawyer uses to describe firms at the top of the profit per lawyer and revenue per lawyer heap, far outpaced the rest of the market. Profit per lawyer among that group increased by 5% last year. Meanwhile firms with lower profitability, those ranked 150 to 200 in profit per equity partner, saw declines on average. Similar patterns were seen in profit per equity partner growth rates, with the highest profitability firms outpacing lower profitability firms by 13 times. The takeaway from these data points is relatively clear. While many firms did extremely well in the past fiscal year, many did not. Is this as good as it gets? Beyond firms varied performance, this year's Am Law 200 data reveals other reasons for worry. The U.S. economy is a decade into an economic expansion. Historical trends, and the opinion of most economists, suggest a downturn is around the corner. If the economy sours law firm performance will slow significantly next year. That raises an uncomfortable question: is this as good as it gets? If this year is a highwater mark for law firm financial performance in this economic cycle it will be a big step down from past heights. In 2008, the top of the Am Law 200's performance in the previous economic cycle, law firms grew revenue by 13%. That is nearly double the rate of the 2018 fiscal year. Revenue per lawyer grew 50% faster that year. Profitability growth also increased roughly 50% faster as well. This data points to an uncomfortable finding. Law firm performance, on average, appears to be declining. The Am Law 200 performed less well in 2018 than historical trends would forecast. That suggests that many of the dominant trends creating difficulty for law firms over the past decade are still at play. Law firms are still contending with increased push back from clients on rate increases and new competition from tech enabled alternative service providers. While these headwinds were not strong enough to overcome the forces helping law firm performance this year, they likely turned what would have been a great year into a good year. This is bad news for firms. When the economy turns, and it certainly will at some point, those headwinds will still be blowing. What happens when the next downturn happens? If a downturn does occur within the next year, some aspects of law firms' response is fairly predictable. Law firms are highly likely to slow, or freeze, associate hiring. This occurred in the past downturn and is likely to occur in the next. Cost cutting is also likely. While the fortunes of most law firms improved last year, performance across the Am Law 200 was not even. Stronger economic growth in the U.S., a buoyant deal market, and increases in litigation helped some firms' growth rates soar to record heights. For others these tailwinds transformed declining financials last year into modest growth this year.

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