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Law Firm Profits Soared In 2021, Despite Increased Expenses
A recovery from an aberrational 2020 and the delay in returning to the office created an unusual set of factors behind the extraordinary performance seen by the law firm industry in 2021. Strong demand growth led to a war for talent, but it was also a major driver of the industry average double-digit revenue growth seen in 2021. And while the war for talent drove pressure on compensation expenses, the delay in returning to the office helped stem the anticipated spike in operating expenses, resulting in lower than expected total expense growth. As a result, revenue growth far outpaced expense increases, leading to one of the strongest years on record for profit growth for all segments of the market.
These results are based on a sample of 196 firms (79 Am Law 100 firms, 52 Second Hundred firms and 65 niche/boutique firms). Forty-four of these firms fit our definition of either "international" (between 10% and 25% of lawyers based outside the United States), or "global" (at least 25% of lawyers based outside the United States). Firms with less than 10% of lawyers based outside the U.S. are classified as either "national" (less than 50% of total lawyers based in headquarter office) or "regional" (more than 50% of lawyers based in headquarter office). Citi Private Bank provides financial services to more than 600 U.S. and UK law firms and more than 35,000 individual lawyers. Each quarter, the Law Firm Group confidentially surveys firms in the Am Law 100 and the Second Hundred, along with smaller firms. In addition, we conduct a more detailed annual survey and produce the Law Firm Leaders Confidence Index semiannually. These reports, together with extensive discussions with law firm leaders, provide a comprehensive overview of financial trends in the industry as well as forward-looking insight.
Revenue growth of 14.4% was driven in large part by a rebound in demand. With 6.5% demand growth, it is important to bear in mind that this growth was measured against an aberrational 2020, created by the emergence of the COVID-19 pandemic. That said, even if we measure total billable hours logged in 2021 against the more normal base year of 2019, we saw average annual demand growth of 3.5% from 2019 to 2021. We would have to go back to 2007 to see performance like this. Law firms told us that the spike in activity levels was seen across the board, as M&A and transactional work, as well as finance and capital markets activity remained strong, while litigation and investigations work gained momentum and, for some, real estate activity was strong.
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