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How The Am Law 100 Makes Its Money
The American Lawyer
How did The Am Law 100 make all that money? By maneuvering through a complex and churning market for big-firm legal services that in 2012 saw a group of core large clients buy fewer hours than they had in 2011 while being charged more for their purchases. Year-over-year demand fell by 3 percent even as invoiced rates for associates and partners increased by 2.6 percent.
Those are the top-line conclusions drawn from a fascinating data set from TyMetrix, the electronic billing giant. Working with The American Lawyer, TyMetrix gathered three years of billing records from its $42 billion LegalVIEW database to show the actual purchasing habits of large and midmarket corporate clients. In all, TyMetrix assembled $6.47 billion in Am Law 100 invoices submitted to 68 clients27 are Fortune 500, another 10 are Fortune 1000 companies. Those clients are sprinkled across nine sectors, including banking, technology, industrials, and health care. One caveat: The invoices reflect what the firms charged, not what they collected. The invoices include up-front rate discounts, but this analysis does not capture final payments.
While 2012 showed overall softness, demand was up sharply compared to 2010, when the legal market was still writhing in the Great Recession. In 2010 the TyMetrix clients bought about 3.7 million hours from The Am Law 100. In 2011 they bought 4.4 million. Last year they dropped back to about 4.3 million hours. Over that three-year period, invoiced rates for partners and associates increased by 6.3 percent.
The gains and losses were not spread evenly across the market. One stunning example: In each of the last three years, the top 20 firms on our revenue per lawyer (RPL) charts accounted for at least 39 percent of the total hours purchased and at least 44 percent of the fees charged by all 100 firms, as measured by the TyMetrix data. In 2010 those top 20 firms were charging more for their time. By last year, the rate gap had widened. The average hourly rate for an associate at a top 20 RPL firm climbed from $499 to $549; the average for the other 80 went from $400 to $423. The differential in partner charges was almost as dramatic. The average hourly rate for a top 20 RPL partner jumped from $840 in 2010 to $915 in 2012. The average for partners at the other 80 firms moved from $665 an hour to $702.
Performance varied by practice areas. TyMetrix analyzed four large groups: corporate, finance and securities, general liability, and intellectual property. None of them showed across-the-board gains for both associate and partner hours. Finance and securities had the biggest drops: The 2012 hours were lower than 2010 and 2011 for both partners and associates. Purchased hours were down by about 22 percent. This was bad news for law firms, because the rates for finance lawyers are consistently above average. As a group, IP partners showed the biggest uptick. Purchased hours increased almost 75 percent over the three years. By contrast, hours for corporate partners peaked in 2011.
The TyMetrix numbers are aggregated and divorced from individual matters or firms. But they offer some insight into firm leverage. By one measure, the top 20 RPL firms appear to have greater leverage than the other 80. In 2012, for example, the ratio of purchased associate-to-partner hours was roughly 3:1 at the top 20 RPL firms, while it was roughly 1.5:1 at the other 80.
The most endangered species in The Am Law 100 appears to be the junior associate. The number of lawyers with less than three years' experience who billed hours plummeted by 30 percent between 2010 and 2012, from 3,322 timekeepers to just 2,327. There are several possible explanations. Clients have been noisily demanding that firms not assign junior associates to their matters. That may account for part of the impact, but not as much as the publicity would suggest. According to the TyMetrix numbers, first- and second-year associates accounted for more hours than the midlevel or senior associate groups. Two related factors seem more likely explanations. Since 2010, the young lawyers moved into midlevel associate status. And, because of reduced law school hiring, they weren't replaced in equal numbers.
This junior associate movement may explain some of the overall rate increases the firms recorded. As the associates stepped up in rank, their invoiced hourly rates increased. If the dearth of associates continues, get ready for the coming crisis in senior associate retention. You read it here first.
This article originally appeared in The American Lawyer.