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.”
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.
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.”