The AmLaw 200: Will The Divide Continue?

Over the last few weeks, fiscal 2011 results for many firms have been trickling in and soon, we'll see the results first for the AmLaw 100, then the full AmLaw 200.  But if the past few years are any indicator, the results for the AmLaw top 50 will once again be quite good, and the AmLaw bottom 150 will have garnered a smaller overall share of the AmLaw 200 revenue.

Since 2003, there's been a steady shift of overall AmLaw 200 revenue to the top 50, and the other metrics are following suit. 

Revenue and Profitability

To say the total AmLaw 200 revenue has grown since 2003 would be a bit of an understatement, with roughly 70% growth.  More importantly, though, has been the subsequent profitability growth, which has nearly doubled since 2003, growing a whopping 83% in the same period.  Since 2003, the margin has also increased from 35% in 2003 to slightly more than 28% in fiscal 2010.

Additionally, the number of firms generating more than $1 Billion in annual revenue has, um, slightly increased as well.

Total Headcount and Equity Partners

Overall, the average headcount in AmLaw 200 firms increased 25% since 2003; the average AmLaw 200 has gone from an average of 454 attorneys to 568.

At the same time, the average number of equity partners has increased at exactly half the headcount rate, increasing 12.5% since 2003.

However, upon closer examination, we'll see that the headcount increase is actually fairly concentrated to the AmLaw top 50 firms.   Since 2003 - and fueled, in part, by several mergers - the AmLaw top 50 average headcount has increased by 41.5%.  In Comparison, the bottom 150 of the AmLaw 200 has seen a more moderate 19.3% headcount increase during the same period.

The average growth of equity partners for the AmLaw top 50 follows suit with the overall AmLaw 200 total headcount / equity partner growth rate, growing at 50% of the headcount growth rate.  As noted above, the average AmLaw top 50 firm grew headcoiunt by 41.5% since 2003; the equity partner growth rate for the AmLaw top 50 is a solid 19.2% over the same period.

For the AmLaw 200's bottom 150 firms, the equity partner growth rate since 2003 is essentially one-third of their top 50 brethren, growing at a very modest 6.9%.

Revenue Per Lawyer and Profits Per Equity Partner

Overall, the AmLaw 200 has seen solid growth for RPL (Revenue Per Lawyer) and very strong growth for PPEP (Profits Per Equity Partner) since 2003.  The average RPL has grown 34% since 2003, with the average PPEP growing a whopping 61% during the same period.

The average RPL growth split between the AmLaw top 50 and bottom 150 is foreshadowing the total revenue splits between the same groups.  The average RPL for the AmLaw top 50 rose by 42% since 2003, while the average RPL for the bottom 150 grew at slightly more than 30% during the same period.

The PPEP split is interesting, mainly because with this metric, dividing the firms with the top 50 and bottom 150 means that profit machines like Wachtell are often right around the dividing line, and other perenial top PPEP firms like Quinn Emanuel, Cahill Gordon, and Schulte Roth (among others) squarely in the bottom 150 due to their overall total revenue.  In fact, for purposes of this study, Wachtell was included in the AmLaw top 50 in 5 of the 9 years examined. 

With that said, however, the PPEP average growth numbers still heavily favor the AmLaw top 50 firms, which saw their average PPEP grow 74% since 2003, while the bottom 150, even with some of the traditionally strong PPEP firms mentioned above included, saw their average PPEP only grow 54% during the same period. 

So, to recap:  The AmLaw top 50 has seen their total headcount grow an average of 41.5%, their equity partners grow an average of 19.3%, their average RPL grow by 42%, and their average PPEP grow over 74% in the same period.  All in all, considering some of the economic complexities that were faced during this period, not bad.  Not bad, at all.

Share of Total Revenue

Quite possibly, the most telling metric is the share of total AmLaw revenue.  In 2003, the AmLaw top 50 accounted for 52% of the total AmLaw 200 revenue.  By the time the 2011 AmLaw 200 was published in Q2 2011, the top 50 accounted for 57% of the total AmLaw 200 revenue.  While the 5% increase in overall share seems modest at first glance, the chart below should illustrate the growing divide between the top 50 and the bottom 150. 

It will be interesting to see when the full 2012 AmLaw 200 is released in a few months if all the patterns, especially the total revenue share, continue in the same directional trend as the past few years. 

This Would Be Funny....If It Wasn't So True

But it's still pretty funny.

With thanks to longtime friend Heather Morse (@heather_morse; The Legal Watercooler), I present to you a fictionalized version of a very real conversation.   In a way, sort of like Office Space...and Kevin Spacey's character in Horrible Bosses, a little over the top, but still extremely close to reality.

In the immortal words of John Bender, "Depressing and sad, yet socialable".

The Business of Law & Porter's Five Forces

It’s been more than thirty years since a young Harvard associate professor of Economics published his first Harvard Business Review article, “How Competitive Forces Shape Strategy”.  That single article has since led to multiple books and has completely redefined how organizations view and approach competitive strategy.  And, as the market for legal services continues to grow in complexity, never before has this simple treatise been more relevant to the legal profession.

The Five Forces consist of the Bargaining Power of Suppliers, the Bargaining Power of Buyers, the Threat of New Entrants, and the Threat of Substitute Products & Services, all which surround the most powerful force, which is the Rivalry Amongst Existing Competitors.    In the years since the article was first published, the propensity for all five forces to simultaneously impact the legal profession has not happened, until now.  

The first market force is the bargaining power of suppliers.   While this means different things to different industries, for the legal profession, supply is all about talent.  In the last 3 years, the legal industry has seen a growing surplus of talent, leading to lower cost associates, staff, and contract attorneys, enabling more adaptive law firms’ greater opportunities to introduce alternative fee arrangements.  This provides greater efficiency and predictability for the client and profitability for the firm.   At the same time, the competition for talent amongst lawyers with established books of business has never been stronger, leading to rising lateral recruiting costs and increased risk relative to the portability of client relationships.

The second market force is the bargaining power of buyers, and this is where the greatest power is being leveraged.   While many in the industry will rightfully point to the ACC “Value Challenge”, or the increased involvement of procurement departments in the hiring of outside counsel, or just overall price sensitivity, I believe there are two under-the-radar changes which have unleashed a great deal of transformation in the legal profession.  First, the increasing number of corporate legal departments which are not outsourcing large amounts of legal work to outside counsel, deciding instead to leverage the oversupply of legal talent in the market to staff their own departments in a much more cost efficient manner.  For many law firms, this can be a very uncomfortable scenario, when the client is also the competitor.  Second, about 5 years ago, many buyers of legal services stopped paying for research charges firms typically passed on to their clients, on top of hourly rates.  For many law firms, this change immediately resulted in millions of dollars of added cost, making a sudden and intense impact on profitability.

The third market force is the threat of new entrants, and this can be applied in a variety of ways.  For the last decade, technology has been leveling the playing field between smaller firms and larger firms, creating an additional layer of competition that also distributes market forces to the rivalry amongst existing competitors.  Smaller firms are posing a threat to larger firms largely because the perceived value derived from smaller firms is been seen as equal to, if not greater, than larger firms in the eyes of many buyers.  Additionally, an increasing number of international firms are making growth in the U.S. a strategic initiative, which is creating greater complexity in markets and sectors traditionally dominated by U.S.-based firms.

The fourth market force is the threat of substitutes, and like the threat of new entrants, this market force continues to exert increasing leverage in the market.   Legal Process Outsourcing (LPO) and the Legal Services Act are the primary drivers of this market force.  More and more companies are utilizing LPO as an alternative to both growing their in-house staff and handling work internally, as well as an alternative to some legal work that has traditionally been handled by outside counsel.

The final market force, the hub from which the other market forces extend, is still the most powerful for the legal profession, and that’s the rivalry amongst existing competitors.   While the explosion in mergers over recent years has eliminated some historic rivalries, the market forces discussed earlier, specifically the threat of new entrants, the war for lateral talent, and the bargaining powers of buyers, all provide additional complexity to the rivalry amongst existing competitors.   Law firms continue to compete against each other for existing demand, creating commodity offerings with little differentiation, leading to increased buyer power.  Unfortunately for the law firms, as more legal work continues to be kept in-house or handled by LPO, the competition amongst firms will continue to intensify. 

Moving forward, law firms need to combat these five forces to by uncovering, creating, and eventually capturing new demand.  The differentiation law firms seek to establish may not be in new products, so to speak, but in new service models that create separation from rivals and provide the uncontested market space necessary to limit the impact of Porter’s Five Forces on their operational strategy.

Fantasy Football - That Time Of Year, Again

    It's that time of year, again....when more time is wasting obsessing over numbers, splits, and red-zone options.