Jami Wintz McKeon ()
Is there an ideal path for law firm leaders to follow in the current legal market? Not surprisingly, it depends who you ask.
Panelists who met to discuss law firm leadership in New York City on Thursday agreed that clients are bringing more work in-house, while also demanding more for less from their outside counsel. As for how firms should respond, the answers—and the evidence—are mixed.
“Law firms continue to be in a period of flux,” said Jamie McKeon, chair of Morgan, Lewis & Bockius, describing the state of the profession at the Thomson Reuters Law Firm Leaders Forum.
McKeon made the case for size and breadth, saying that Morgan Lewis, a firm of 1,880 lawyers, can better shoulder the cost of necessities like cybersecurity protection and systems for storing and retrieving documents than a small firm. She added that her firm’s clients say they spend a lot of time managing their outside counsel.
“If you can get it right, they want to deal with fewer firms, not more,” McKeon said.
But Beau Grenier, chair of the much-smaller Bradley Arant Bolt Cummings, stood up for the regional firm model, with support from the panel’s moderator, Thomson Reuters Legal Executive Institute chairman Ralph Baxter.
“Because we have a much lower overhead, that gives us more flexibility in what rates we can charge,” Grenier said.
Those lower rates have helped Bradley Arant, a Birmingham, Alabama-based firm of about 450 lawyers, attract lawyers with big books of business who have decided that they can’t continue to charge their clients high rates at a larger firm.
In his opening remarks, Baxter said that demand is flat at Am Law 100 firms because legal work is going in-house and to regional firms “that have maintained their quality and character in this time of change in the world. They’ve not over-expanded.”
The devil, of course, is in the details. The size and geographic scope of a law firm does not seem to determine the profitability of a firm, according to data released at the event by Thomson Reuters’ Peer Monitor. William Josten, a senior analyst at Thomson Reuters, presented the data, which showed that the top performing firms varied in size and type.
Compared with size, realization rates, the amount of money invested in business development, and the ratio of equity partners to associates each had a higher correlation with growth in profitability, Josten said. The data compared various characteristics at the most profitable firms with the same characteristics at firms that saw no growth in profits to show what sets the most successful firms apart.
Firms whose profit grew annually by 10 percent or more between 2013 and 2015 had an average realization rate of 83.3 percent, compared to 81.4 percent for firms that saw no growth in profit, the Peer Monitor data showed. Both groups raised their rates by an average of a little over 2 percent during that time, showing that rate increases are not a differentiator.
That means that while everyone is raising their rates, the most successful firms are those that can actually collect on their bills.
On average, the firms that saw profits grow also had more associates per partner, with an average of 32 percent equity partners and 39 percent associates, Josten said. The less profitable firms were made up of 39 percent equity partners and 35 percent associates. The portion of nonequity partners was roughly the same in both groups.
Josten said the relatively low associate ratios were a “legacy of the fact that a lot of firms were reticent to hire first-year associates” during the recession. “Firms don’t have the depth that they used to,” he added.
Finally, the more successful group grew their business development expenditures by 4.2 percent, compared to a growth rate of 2.3 percent at the less profitable firms. It wasn’t clear whether the profitable firms simply had more money to spend, or if their growth in profitability was a result of the spending.
The panelists agreed that in 2016, law firms on the whole will most likely not see the kind of growth in profitability they saw last year.
“Comparisons to last year are going to be a disappointment,” said Sheppard, Mullin, Richter & Hampton chief operating officer Ted Tinson. “There’s something going on in the jungle out there. We’re all reacting to it differently.”
For all the challenges law firms face, Aric Press, a partner in the legal consultancy Bernero & Press and former American Lawyer editor in chief, said one thing has not changed: To succeed, you must know your clients.
“You need to know which of your clients are on the cutting edge, which of your clients don’t want change much at all, which of your clients are going to squeeze you for the Wal-Mart price and which are not,” Press said.
Contact Nell Gluckman at email@example.com. On Twitter: @NellGluckman