Law firms are facing intensifying growth pressure. Competitive and client forces have pushed law firms to not only focus on increasing revenue and profitability, but perhaps more importantly, to add practice depth, practice breadth, overall scale, and geographic reach. Significant investments in lateral hiring and law firm combinations have changed the competitive landscape by forming new, dominant firms in particular practice areas, industries, and geographic regions. This has reshaped the AmLaw 200, with an increasing number of firms now offering considerable scale and reach compared to existing competitors, regionally, nationally, and internationally. This evolution has created new choices for clients seeking advisors who can provide services across multiple jurisdictions or offer superior depth in particular practices and industries, further fueling the race for market share and the pressure on law firms to grow.
Each year we look ahead and make predictions for the coming year. Each year brings uncertainty, and 2023 appears to be bringing more uncertainty than most. Economic headwinds, inflation, the threat of a possible recession, global unrest, and in particular the decline in the corporate transactions that drove much of law firms’ success in 2021 and the first half of 2022, are raising questions for many about what the coming year will hold for law firms.
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?
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 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.