Tepid growth among the nation’s 350 largest law firms in 2012 showed that the highly leveraged, bottom-heavy ways of doing business have become unsustainable.

Overall, the nation’s largest 350 law firms grew by just 1.1 percent last year. Partner ranks expanded by 1.5 percent, while associate numbers edged up by just 1.0 percent. The number of other lawyers, including staff and counsel positions, dropped by 0.2 percent in 2012.

Results of The National Law Journal‘s NLJ 350 for 2013, a survey of the nation’s 350 largest firms by the number of attorneys, backslid from the 1.7 percent increase among the nation’s largest firms in 2011. The numbers were better than the falling or flat headcounts during the 2008-2010 recession years, but the 1.1 percent uptick was the smallest increase in nearly two decades.

The addition of 1,505 lawyers to the NLJ 350 law firms in 2012 represented a gain about equal to the size of law firm Kirkland & Ellis, but still amounted to a drop in the bucket considering that 141,056 lawyers worked at NLJ 350 firms during 2012.

Our NLJ 350 rankings are based on a survey of hundreds of the nation’s largest firms. The numbers represent the firms’ tallies of full-time lawyers including partners, associates and staff attorneys as of Dec. 31, 2012. DLA Piper at the top of heap had 4,036. The firm beat out Baker & McKenzie and returned to the No. 1 spot after landing there twice before, in 2007 and 2008. The smallest firm on our list was No. 350 Looper Reed & McGraw, with 117 lawyers.The trend toward slow expansion is bound to continue, said David Wilkins, a professor at Harvard Law School whose scholarship focuses on the legal profession. "We certainly are done with the growth that we had been seeing prior to 2008," he said.

The reason? Clients. Law firms traditionally bolstered revenues by increasing both their billing rates and their leverage — that is, deploying more junior lawyers on matters to rack up the number of hours billed, Wilkins said. But corporate clients simply won’t stand for that anymore, Wilkins said. "They’re not going to pay for it," he said. (If not for a change in the way No. 1-ranked DLA Piper reported its associates and other attorneys during 2011 versus 2012, the number of associates actually could have dropped by about 0.6 percent.)

Meanwhile, demand remains low. A study released this year by Georgetown University Law Center and Thomson Reuters Corp. found that the U.S. legal market was unable to sustain steady growth following the recession. In 2012, according to the study, the growth rate was 0.5 percent, well below prerecession levels of 3.9 percent. The Am Law 100 numbers correlated: Only 76 of the 100 firms had increases in gross revenue in 2012.

Of the work that clients are doling out, more of the routine matters are going to legal process outsourcing providers (LPOs), companies — often offshore — that handle large-scale document review, legal research and other services that don’t require client contact. A study released last year by Mary Lacity, a professor at University of Missouri-St. Louis, and Leslie Willcocks, a London School of Economics professor, found that LPOs made up a $2.4 billion market globally and were growing at an annual rate of 28 percent.

"There are large-scale forces that were going on before the recession that have gotten pushed along or accelerated," Wilkins said. "They’re not going away just because the Dow goes above 15,000."

GROWTH AT THE TOP

Headcount increases tended to be larger among the biggest firms on the NLJ 350. The top 100 law firms boosted their numbers by 2.6 percent, compared with the 1.1 percent overall growth. Competition has become increasingly tight for these top firms, said Brad Karp, chairman of 803-lawyer Paul, Weiss, Rifkind, Wharton & Garrison. His New York-based firm grew by 9 percent during 2012.

"First, there is intense competition for the small slice of bet-the-company litigation, regulatory defense and transformative transactional matters that are the lifeblood of elite New York-based law firms," he said. "And, second, even if you’re fortunate enough to land these matters, you must consistently deliver extraordinary results and an effective value proposition."

Smaller firms with lower rates are enjoying the added attention from savings-conscious clients. But they continually have to prove that the cheaper price doesn’t compromise service quality.

"If there’s anything continuing to change in the marketplace, it’s that it’s becoming even more of a buyers’ market," said George Joseph, managing partner of Nossaman, with 134 lawyers. The Los Angeles-based firm in 2012 decreased by eight lawyers, six of them associates. Nossaman, with four of its seven offices in California, is comfortable with its regional niche and its leverage model these days, Joseph said. It has 95 partners and 39 associates. "Not being as highly leveraged has put us in a good position competitively," he said. "We don’t have a situation where we have a lot of mouths to feed."

Leigh Jones can be contacted at ljones@alm.com.