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Credit: Roberto Jimenez.

While the Am Law 100 ranking tells us about the comparative financial strength of individual firms, a look inside the firms—specifically at the number of lawyers by office—reveals an important dynamic affecting the financial outlook of the industry: Since the last market peak, in 2008, the 50 largest U.S. firms contracted by 3,000 lawyers in the United States while growing by 8,700 lawyers abroad. As a result, international lawyers now comprise 35 percent of total Am Law 50 lawyers, up from 24 percent a decade ago.

This tilt toward overseas markets puts a drag on firm-average profitability. The drag caused by the lower price point and billed hours of international markets is well known, but it has been compounded over the past decade by so many of the Am Law 50 growing internationally at once, thereby increasing competitive intensity and dramatically shifting market power to clients. The lower profitability of international markets is an issue for partnerships with firmwide lockstep compensation because it leads to U.S. partners effectively ­subsidizing the compensation of their overseas brethren. As firms shift lawyers to international markets, these subsidies have grown. The growth can be overlooked in the froth of today’s market, but it will cause severe tension when the economy turns. This is more than a matter of fairness among partners; it’s a matter of strategy. Substantial, sustained subsidies augment the risk of the highest-value U.S. partners being lured away by domestic rivals. Wise firm leaders are getting out in front of these issues now.

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