Law firms that hope to succeed in the future need to embrace the shifting realities of the marketplace now, according to a new report that serves as the latest in a string of warnings that the legal sector will never return to its pre-recession heyday.
Jointly produced by the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Peer Monitor, the report draws on a variety of other studies conducted over the past year on such subjects as partner compensation, law firm composition, and demand for lawyers to paint a portrait of an industry in flux.
Based on data culled from 135 firms in the Peer Monitor database, which tracks metrics such as demand, rates, productivity and expenses, the report describes 2012 as "another year of only modest growth" that produced an average uptick in profits per partner of just 3.58 percent among the surveyed firms. Without breaking those firms into categories based on size or total revenue, the report notes that firms residing within the ranks of The Am Law 100 saw their profits rise just 2.45 percent in 2012, compared with the average 4 percent gain enjoyed by non-Am Law 100 firms.
The Georgetown report does not offer any conclusions about how the firms performed in terms of gross revenue last year. A recent study from Wells Fargo Private Bank’s Legal Specialty Group, however, found that gross revenue rose 5 percent in 2012 among its survey of 100 firms, including more than 50 in the Am Law 100. The Wells survey found profits within that group rose 5 percent on average in 2012.
So far, several Am Law firms have exceeded those averages, according to The American Lawyer‘s early Am Law 100 reporting.
At Irell & Manella, for instance, preliminary numbers show the firm enjoying a 19 percent surge in profits, to $3.42 million per equity partner. Baker & Hostetler, meanwhile, saw its profits jump 10 percent, to $930,000. DLA Piper profits per partner rose a more modest 6.9 percent, to $1.3 million.
At the other end of the spectrum, several firms did see their profits slide last year, according to early reporting. McDermott Will & Emery’s profits dropped 2.7 percent, to $1.46 million, while Jenner & Block’s slipped 3.6 percent, to $1.49 million.
The Georgetown-Peer Monitor study also found that demand for legal services increased just 0.5 percent last year, based on the number of billable hours logged by firms that report to Peer Monitor. Labor and employment lawyers saw the biggest increase, 4.1 percent, while litigators’ were off slightly and corporate lawyers racked up 1.2 percent more billable hours.
The number of lawyers in U.S. firms, however, increased by 2 percent in 2012, according to the report, contributing to what the authors call an overcapacity in the market.
Among the study’s other findings:
• Though law firms laid off thousands of lawyers during the downturn, their productivity—as measured by hours logged per lawyer—remained relatively constant between 2009 and 2012.
• Billing rates rose an average of 3.4 percent in 2012, from $464 per hour to $507, compared with an average annual increase of between 6 8 percent prior to the recession.
• Realization rates were 82.8 percent among Am Law 100 firms and 85 percent among Second Hundred firms in 2012—figures the report describes historic lows.
• Competition is increasing among firms, meaning "the only way (short of a merger) for a firm to capture market share is to take it from another firm."
Echoing the message embedded in a state-of-the-industry report issued by Citi Private Bank’s Law Firm Group and Hildebrandt Consulting last month, the Georgetown-Peer Monitor reports says law firms will never revisit their pre-recession heyday. In fact, the report’s authors even dismiss the success firms had in the decade prior to 2008, homing in on annual billing rate increases "that bore little relationship to what was going on in the broader economy" largely driving up profits.
"The cumulative impact of these increases over time," the report states, "created a trajectory that was simply unsustainable."