Why Law Firms Need to Know Themselves—and Their Competition—to Get Ahead

A few years ago, we met with a young lawyer at a mid-market litigation firm who expressed a great deal of annoyance with a story that said partners at a certain group of Am Law 200 firms made, on average, the same amount as senior associates at elite firms.

Factual? Yes. The average compensation for all partners, including equity and nonequity, is less than $400,000 at several Am Law 200 firms. And at some of the most profitable Big Law firms, especially when taking bonuses into account, some associates make more than that in a year.
But do those numbers capture the full story of these firms’ profitability and their lawyers’ success? Absolutely not.

While the numbers behind that contention don’t lie, there are a few really big elephants in the room that the numbers alone don’t address: the practices, clients and geographic footprints of these two groups of firms.

Simply put, comparing compensation at a mid-market firm and an elite Wall Street firm isn’t very meaningful. They’re not in the same peer group.

But there are quite a few mid-market firms in the Am Law 200, and there are 43 firms on this year’s list with 250 or fewer lawyers, which we like to call midsize firms. Some midsize firms would tell you they don’t really have mid-market clients—they are boutiques with fewer than 250 lawyers that do high-end work in a specific niche. And, on the flip side, some firms with more than 250 lawyers would tell you their clients fit squarely into the definition of "middle-market business."

As with other methods of categorizing people and businesses, these labels only go so far. They may not be able to predict a firm’s success, but they still create a measuring stick for similarly situated firms.

In a year like 2020, having a peer group to look to is obviously important. And in this peer group, we saw several interesting trends.

Numerous firms took out Paycheck Protection Program loans. A lot of them, either because of the loan conditions or for independent reasons, steered away from doing any layoffs or furloughs.

Several mentioned that certain clients were hit hard—retail, hospitality, real estate—and they looked to provide payment flexibility to those clients.

Gross revenue across this group was almost flat, down less than 1% from 2019. But many of the firms that saw big declines in gross revenue also saw head count decrease. So revenue per lawyer in this group actually increased by 2.7% on average. That number nearly matches the number for the entire Second Hundred, which saw 3% RPL growth, but it lags behind the Am Law 100, which saw 4.8% growth in RPL.

Looking at partner profits, there’s a bigger discrepancy. While the Am Law 100 saw a whopping 13.4% jump in profits per equity partner, and the Second Hundred saw an 8.8% increase, the midsize firms within the Second Hundred saw profits per equity partner grow by just under 6%.
Skeptics of the Am Law rankings might shake their heads at these numbers and say it’s unfair to compare the firms in these segments. They’re not wrong. But that’s all the data does.
Looking at these averages, a midsize firm can see that if it held on in 2020, but didn’t hit it out of the park, it isn’t alone. It can see that while cutting down on some expenses, like travel and business development, provided a profits cushion, it didn’t create the massive windfall it would have at a firm whose expense line is typically much bigger.

Coming out of 2020 and into the post-pandemic future, it’s going to be more important than ever for firm leaders to recognize and understand their peer groups—not just the elite firms or market leaders, but those that are in similar situations because of their size, practice mix or geographic strategy.

We’ve seen and heard time and again how a law firm’s sense of identity is among the most important factors in its success. A firm must know the types of businesses it serves, and in which industries and which markets. It must know and be honest about who the competition is—who one’s peers really are. Knowing "who we’re not," as many midsize firm leaders have put it to us, is important. And a firm with a seven-figure PEP number just might not be who you are. That’s not complacency. It’s reality.

In a lot of geographic markets, peer groups have shrunk down as midsize firms merge with larger ones. Perhaps their lawyers are still working with mid-market clients, but the firm they work for is simply on a larger scale.

But within the Am Law 200, one might argue that the midsize peer group is growing. There were three midsize firms on the Am Law 200 this year that didn’t make the list in 2019: Offit Kurman, FisherBroyles and Herrick, Feinstein.

The first, Offit Kurman, is a Maryland-born firm with a rapidly expanding geographic footprint and 232 lawyers. It focuses on providing legal services to small and privately owned businesses, as well as more personal services like trusts and estates work to the leaders of those businesses.

FisherBroyles, for those who aren’t already familiar, is the first "distributed" firm to crack into the Am Law 200. With no offices and no associates, it’s an entirely different business model, and one that has been extremely alluring to a number of Big Law expats in the last several years, bringing the firm to 249 lawyers.

And Herrick Feinstein, a 130-attorney firm based in New York, is well known for its real estate focus, including in transactional, finance and litigation work. Like many successful midsize firms, it is often approached for merger talks by larger firms, but talks with Crowell & Moring failed in recent years.

Firms within the Am Law 200 continue to consolidate. We saw a couple examples of that last year with the creation of Troutman Pepper Hamilton Sanders and Faegre Drinker Biddle & Reath, and it’s likely more such combinations come to fruition this year. As this happens, it opens up more room in the Second Hundred for this midsize, mid-market peer group to grow.
Your peer group changes as your firm changes, and as the market changes—and the market continues to do just that. We’ve become accustomed, year after year, to seeing that change means those at the top continue to pull away from the pack. But there are plenty of substantive changes available to create advantages for midsize firms—at least for those who know who they are, who they’re not, and who they’re competing against.

Source: The American Lawyer