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.
The legal industry is in the midst of a war for talent. Partner mobility continues at a high rate, at all levels of the market. Associate recruiting has never been so competitive, with generous signing bonuses becoming the norm for experienced corporate associates. On the flip side, between partner retirements, lawyers moving to other firms or in-house, or lawyers leaving the profession altogether, retention of talent is a continuing challenge for many firms. A recent Peer Monitor report showed that turnover over the last 12 months, through the 3rd quarter of 2021, was 13.8%. Despite dramatically increasing associate compensation, healthy growth in partner profits, and a strong focus on recruiting and retention, many firms are at best treading water in terms of size, and at worst shrinking.
Making predictions for the year is always risky. When we made our predictions for 2020, we never anticipated that we would have the kind of year we’ve just completed. To our credit, we did predict that firms would need to be prepared to manage in headwinds, and that enhancing leadership diversity and reducing bias would be important priorities for law firms. Each of these turned out to be true, although we didn’t imagine the degree to which they would dominate the agenda for firms in a challenging year on so many fronts.
In recent years, we have worked on a number of law firm mergers where one of the firms was in a significantly weakened position relative to its past. More often than not, these mergers fail to move forward because there is too much uncertainty about the stability of the firm, the deterioration of its financial condition, and the questionable commitment of key partners to remain with the combined firm.
It would be a significant understatement to say that negotiating and executing a merger in the middle of a pandemic is complicated. However, it is not impossible. While we expect merger activity among law firms to be down in the second half of 2020, we are seeing an increasing number of firms begin to reinvigorate their growth strategy and consider merger.