ALM Intelligence has previously examined the impact of lawyer headcount on firms that have experienced significant gross revenue growth in the years since the Great Recession. A finer focus on revenue per lawyer (RPL), however, reveals a still more complicated dynamic of law firm financial performance.
A firm’s RPL is broadly reflective of its rate structure as determined by the markets and clients it serves. RPL does not take into account costs or margins. Consequently, it isn’t necessarily the case that high RPL is good and low RPL is bad. A firm can be profitable at either end of the market. However, growing RPL can be interpreted as a sign of healthy activity, as it is important to maximizing top line growth.
ALM Intelligence analyzed law firm financial and headcount data for 180 firms (including some that were the result of mergers) that were ranked within the Am Law 200 each year from 2010 to the present (hereinafter, the Consistent Am Law 200 Firms). Approximately 60% of the Consistent Am Law 200 firms have been able to grow their RPL by only 1% to 3%, suggesting that a majority of firms are operating at maximum revenue generating capacity.
That said, though market conditions are tough, some firms, including the 10 identified below have demonstrated an ability to grow their RPL.
How did these 10 firms achieve RPL growth in the range of 5% to 7% when most of their peers were mired in the low single digits? In terms of the RPL formula, some firms increased the numerator (revenue) while decreasing the denominator (total lawyers) while others produced more revenue on steady headcount, and some saw increases in both revenue and headcount. These divergent paths to the same result (RPL growth) are best illustrated by Robins Kaplan, Baker Botts, and Quinn Emanuel. Each firm achieved approximately 5% RPL growth and did so while increasing revenue. But, Robins Kaplan did so while decreasing headcount, Baker Botts while holding headcount level, and Quinn Emanuel while growing headcount (see table below).
For an individual attorney or any fee earner in a professional services context, increases in revenue generated can be achieved via raising billing rates, increasing utilization rates, or a combination of the two. As a result, a firm that is posting RPL growth is one that has been able to execute on those tactics on an enterprise level. However, there are risks involved with each.
Even though firms like to view any service provided as high value, and thus, justifying a premium rate. Raising rates too much can leave firms vulnerable to competition. Clients have become more price sensitive, and in the face of price increases, they won’t hesitate to move work in-house or to another firm. In considering rate increases, firms need to be particularly aware of the relationship between a client’s tolerance for paying a higher rate and the practice areas and geographies being served.
This is more than an algebraic equation, of course. Well before maximum availability of attorneys is reached, increases in utilization are limited by an individual’s willingness, in the age of work-life balance, to burn the midnight oil year round. As a result, some firms are getting creative. According to a recent report in the UK’s Daily Mail, some are going so far as to instruct their lawyers to bill for time spent thinking about clients during short breaks, like getting coffee or using the bathroom.
In maximizing top line revenue, firms are performing a delicate balancing act. If they push too hard on rates, then they may lose business to the competition, but if they demand more time be spent at the office, they risk driving down morale and driving away their top talent. These challenges are exacerbated by a post-recession new normal where there is increased competition and price sensitivity along with a new generation of employees who place a premium on work-life flexibility.
Given these obstacles, the RPL growth of the 10 firms identified above seems remarkable.
ALM Intelligence Notes:
- Threat and Opportunity: Check out ALM Intelligence’s report Cybersecurity and Law Firms: Defeating Hackers, Winning Clients for details on how vulnerabilities in law firms’ data security present an existential threat, while increasing corporate demand for legal expertise in information security, compliance and incident response provides an emerging revenue growth opportunity.
- Government Laterals: The competition for Obama administration lawyers is heating up as Gibson Dunn lands Stuart Delery a former number three at the U.S. Department of Justice.
- Another Costly Breach?: The merger between Verizon and Yahoo may be in jeopardy. Verizon’s general counsel recently intimated that the impact of the breach of 500 million customer email accounts at Yahoo may have had a material impact on Yahoo’s financial standing, and thus, could be grounds for canceling or altering the deal.