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Law Firms Are More Profitable Than Ever. How are They Doing It?
Law firm profitability is at a record high. The average equity partner, at an Am Law 200 firm, received $1.8 million in profit sharing compensation last year. This is higher than any point in recorded history (the Am Law 200 data goes back to 1984). Average profits per equity partner (PPEP) are nearly $500k dollars more, in nominal terms, than they were at the peak in profitability experienced before the past downturn. Even after adjusting for inflation, profits per equity partner are $125k per year more than they were a decade ago. Not bad if you ask me.
Given the myriad obstacles law firms are facing, such increases in profitability seem striking. If clients are becoming more discerning buyers, profitability should be coming under pressure. Rising competition from alternative service providers and the ever-forward march of technology adoption should be having a similar, negative, effect on profitability. This raises an obvious question — how are law firms doing it?
But Wait, Are Law Firms Really Doing that Well?
Before jumping into the question of how law firms are increasing profits per equity partner, it's worth looking more closely at the numbers. Looking at average PPEP, while useful, can be misleading. Averages, after all, are prone to distortion. It's possible, for example, that a few firms are driving the average increase in profitability and the vast majority of firms are struggling. So, let's dig a bit deeper.
Figure 1, below, shows two graphs. The first looks at the average change, since 2007, in PPEP for the Am Law 100 and Second Hundred. This data suggests a wide divergence in performance between larger Am Law 100 firms and their smaller, second hundred brethren. On average, Am Law 100 firms have seen a 16% increase in inflation-adjusted PPEP while Second Hundred firms have seen a slight, 1%, decline.
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