Law firm profits and lawyer productivity rebounded in 2010 — good signs that the market has turned a corner. However, demand was flat and revenues were up modestly compared to a weak 2009. Translation: The increase in profitability was largely driven by expense cuts, which — as we have written previously ["Trench Warfare," October 2010] — have gone as far as they can. To maintain these profit gains in 2011, firms will need to find ways to increase top-line revenue.

First, a look back at 2010: Firms continued their efforts to shrink their way to profitability, with a better outcome in 2010 than in 2009. Despite cutting expenses by 5.6 percent in 2009, firms experienced a slight decline in profits per equity partner (PPEP) of 0.3 percent. Contrast that with 2010, when profits rose 7.4 percent. While demand was essentially flat, and revenue increased only modestly at 1.3 percent, 2010’s profit growth can best be attributed to a 2.2 percent reduction in expenses and an industry-wide drop in equity partner head count of 0.7 percent.

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