Big Law in the United States saw profitability skyrocket in 2020 despite the pandemic. On average, firms in the Am Law 100 noted profits per equity partner (PPEP) increased more than 20 percent in 2020, according to the 2021 Am Law 100 report. Comparatively, the same group saw PPEP increase by less than 10 percent from 2018 to 2019.
March 19, 2022 Business of Law
Profitability During the Pandemic: Law Firms Survive and Thrive
The unprecedented growth was all about cost cutting and “being able to avoid certain expenses.”
By Daniel S. Wittenberg
The Am Law Second Hundred, those firms ranked 101 to 200 for gross revenue, did not fare too poorly either. PPEP for those firms grew roughly 20 percent. The unprecedented growth for these firms “wasn’t something that was driven by increased demand,” notes James R. Jones, Washington, DC, in a press statement for the 2021 Report on the State of the Legal Market. Rather, according to Jones, it was all about cost cutting and “being able to avoid certain expenses.”
By the Numbers
Notwithstanding the chaos of the past year, the top 100 U.S. firms enjoyed extraordinary profitability. Eight firms notched income of more than $1 billion. PPEP in the Am Law 100 increased 13.4 percent over the prior year, and the average profit margin reached 43 percent. Within the Am Law 100, PPEP in 2020 improved at over 90 percent of the law firms. PPEP averaged $2.23 million across those firms. Profits were so robust owing to a combination of high demand for certain services needed during the pandemic, lower expenses, and other related cuts. More than half the Am Law 100 firms had growth of at least 10 percent. This is almost double from the prior year.
The largest increase in PPEP within the Am Law 100 was 46.6 percent. The largest drop was 22.9 percent. Another factor in the large number of firms showing increased profitability was de-equitization. Almost half of the Am Law 100 firms showing improved PPEP de-equitized partners in 2020.
The Am Law Second Hundred had a respectable year in 2020, but their numbers were still well below those of law firms in the top 100. Gross revenue for the Second Hundred increased 1.1 percent to $20.8 billion. Revenue per lawyer increased 3 percent to $707,506. PPEP for these firms grew 8.8 percent to $863,449. Lawyer head count went down 1.8 percent to 29,359.
Almost half of the law firms in the Second Hundred took loans in the Paycheck Protection Program (PPP) last year. An analysis of the firms that took the loans versus those that didn’t revealed that, overall, taking a loan did not correlate with firm performance. However, firms that took PPP loans had significantly lower gross revenue and net income than the other law firms in the Second Hundred. Even so, the loans were important to the firms that took them.
Those that took loans averaged $167 million in revenue compared with $207 million for the rest of the Second Hundred. Only five firms in the top 40 of the Second Hundred took PPP loans. By comparison, most of the bottom half received federal money. Average net income for a loan-taking firm was roughly $15 million less than the $80 million average for firms that refrained. At the end of the day, gross revenue and net income numbers were lower for firms that took PPP loans because they were smaller firms to begin with, not because they took PPP loans.
A lot of businesses are under stress or likewise feeling uncertainty which [means they’re showing] increased care about their legal expenses.
How Did the Midsize Firms Do?
Last year was more challenging for midsize firms than the rest of the Am Law 200. These firms, all with fewer than 250 lawyers, saw revenue gains of less than 1 percent on average. This is significantly less than the Am Law 100 firms. Of the firms that shared their information in this category, PPEP rose more than 5 percent while head count only grew by less than 1 percent.
Demand finished down almost 2 percent. Commented Joel R. Carpenter, Boston, MA, to The Mid-Market Report concerning performance last year, “[s]omebody said to me once that the formula that explains life is: happiness equals reality minus expectations. By that metric [last year] was a good year.” Ronald H. Schechtman, New York, also stated to The Mid-Market Report, “midsize firms tend to thrive when demand becomes increasingly value-oriented and I do think this is happening. A lot of businesses are under stress or likewise feeling uncertainty which [means they’re showing] increased care about their legal expenses.”
The Cuts
Actions taken by firms during 2020 combined with significant reductions in expenses gave rise to strong growth in PPEP, even during a stormy year. Because of the cuts made, almost all segments of the market showed significant improvement in PPEP over 2019, and it appeared that all segments finished the year stronger than expected.
While demand for legal services dropped in 2020, expenses dropped, too. Cutting compensation and head count to preserve cash were not out of the norm. Overhead expenses decreased by more than 4 percent on average for midsized firms from November 2019 to November 2020. The Am Law 200 saw overhead expenses drop on average by more than 6 percent in that time.
Almost all firms significantly reduced costs by making fundamental changes in their operations. These included:
- Stopping or significantly reducing discretionary spend;
- Pausing or significantly reducing external recruitment;
- Reducing partner draw;
- Cutting attorney salaries;
- Furloughing staff; and
- Reducing salaries of support staff.
Firms also implemented the following strategies:
- Adapting to more efficient use of office and administrative space;
- Rethinking changes in staffing and work patterns;
- Altering levels of secretarial support;
- Reducing expectations for in-person meetings;
- Increasing the efficiency of digital connections; and
- Reducing business travel.
Moving Forward
The first quarter of 2021 saw the large law firm market experience three-year lows in demand growth, direct expenses, and overhead expenses, but a three-year high in worked rate growth. Corporate work grew almost 2 percent, driven by strong mergers and acquisitions demand in the Am Law 100 and midsize firms. Litigation continued its run of uninspiring quarters, dropping 1.3 percent. Other practice areas dropped, too, including labor and employment, real estate, and patent prosecution.
The second quarter of 2021 saw significant growth in legal demand and productivity in the large firm market while overhead continued to shrink. Key practice areas demonstrated year-over-year positive results showing a marked difference from the same time last year. Corporate work performed strongly. Litigation posted over 7 percent improvement from the prior year although it was still down compared with 2019. Real estate, tax, antitrust, and labor and employment also posted gains.
“The law firm market has largely regained its footing after persevering through unprecedented challenges,” said Paul Fischer, St. Paul, MN, in a press statement for the 2021 Report on the State of the Legal Market. According to Fischer, “[d]emand, measured in billable hours, rose a remarkable 7.3 percent in the second quarter, which more than made up for the steep decline seen in the same time period a year ago.” Mike Abbott, St. Paul, MN, in the same press statement, noted “[t]he legal market has shown tremendous resiliency in not only withstanding but finding ways to grow amidst the tremendous disruptions of the past year.”
Thank goodness.
Resources
- 2021 Am Law 100, ALM (Apr. 20, 2021).
- Dan Roe, “Protective Measures: What PPP Loans Revealed About the Am Law 200 Firms That Took Them,” Am. Law. (May 18, 2021).
- Dylan Jackson, “Mid-Market Firms Are Seeing Business Roar Back in 2021,” Mid-Market Rep. (July 16, 2021).
- 2020 Law Firm Business Leaders Report (Thomson Reuters Institute Nov. 2020).
- 2021 Report on the State of the Legal Market (Thomson Reuters Institute Jan. 12, 2021).
Copyright © 2022, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).