Insights
The Insights series draws upon our collective consulting experience to address topics that we consider of current interest to the senior management of law firms.
Secrets of High Performing Firms
While some of the elements of differentiation among firms are based on factors like geography and history, others are driven by actions firms have taken to change (or preserve) their competitive position. Based on our work with high performing firms, we see four broad themes that drive superior performance.
Strategy in Volatile Times
While law firms have been necessarily preoccupied with shorter term operational requirements, ongoing evolution in the legal industry and the broader economy continues to challenge firms to rethink their strategy and overall competitive position. Many firms recognize the need for establishing a more current and coherent long term direction, but they also find the idea of long term strategic planning daunting in the midst of tumultuous change. How should law firms seek to develop a strategic plan in such a volatile environment?
Managing Into Headwinds
As we head into the second half of the year, economic headwinds appear to be getting stronger. Demand through Q2, particularly for corporate work, is down, albeit only modestly. Citibank’s mid-year report indicates a 0.6% average decline in demand. Expenses are on the rise, due to higher attorney headcounts and the gradual shift towards a return to office. We have written before about managing through headwinds, along with the lessons learned from previous downturns, and it is time to revisit that topic.
The Problem of Partner Disengagement
Now, more than ever, law firms are struggling with partner engagement. While some might argue that partner engagement was lagging pre-pandemic, remote work, re-prioritization of personal and professional goals, and approximately two years of a surge in demand for services have exacerbated the problem. Many partners today are mentally opting out of remaining informed about and participating in firm strategy and partnership level management discussions. What are the challenges and risks associated with partner disengagement, and how should firms try to solve it?
Accelerating Progress on Gender Equity in Law Firms
The issues of gender equity and diversity have been major topics of discussion in law firms for decades, but in recent years law firms have begun to focus more critically on these issues, and in particular on increasing the number of women and diverse lawyers within partnership ranks and leadership. While there are bright spots, progress remains slow.
In this Insight, we are focusing primarily on gender equity at law firms, but many of the challenges and proposed solutions apply to diversity more broadly.
The Investment Years
The last several years mark some of the highest levels of recurring profitability growth ever experienced for many law firms, outpacing historical profitability growth by a significant margin. Between 2019 and 2020, Profits per Equity Partner (PPEP) among AmLaw 200 firms grew 12% on average, and the Compensation Average for All Partners grew at 10%. While year-end data for 2021 is not yet publicly available, our work with law firms confirms that these growth rates will be met, if not exceeded when ultimately reported for 2021. Given that we are still early in the year, it is hard to predict whether law firms will experience another banner year in 2022. Headwinds around geo-political uncertainty and rising costs, including ever-increasing associate compensation, are likely to pressure profit growth to some degree. However, demand at this early stage appears strong, and results thus far indicate solid financial growth.
Looking Ahead to 2022
Each year we look ahead and make predictions for the coming year. The last two years have been unpredictable in almost every way, but clearly demonstrated the resilience of the legal industry.
Adapting Partner Compensation in High Profit Years
2021 appears to be shaping up much like 2020 – a banner year in terms of law firm financial performance and profitability. We anticipate that many firms will report growth in Profits per Equity Partner in excess of 10% for the year. If this occurs, 2020 and 2021 will mark some of the highest levels of recurring profitability growth experienced for a large portion of AmLaw 200 law firms. In a number of firms, partners with steady-state or even declining performance have experienced material compensation increases by virtue of the firm’s growth in profitability – without an increase in their level of contribution to the firm. Historically, many firms have referred to this as a ‘rising tide effect,’ which has generally been seen as a positive aspect of partnership compensation but can also contribute to increased tension and management challenges.
