21 April 2022
2021s numbers are nothing less than stellar - law firms are reporting in huge profits. But 2022 promises to be very, very different
It has been, well, amazing to read about law firm results for 2021.
Latham & Watkins increased revenue by 26.7% to $5.5 billion and profit per equity partner by 26.2% to $5.7 million. Kirkland’s revenue passed $6 billion and profits per partner reached $7.38 million, a rise of 19%. These are extraordinary numbers from legal businesses that are huge. Kirkland has 1,253 partners, of whom 490 are in the equity.
The results at the more compactly sized Wall Street leaders were also very impressive. Wachtell hit PEP of $8.4 million (up 12%) and Cravath made PEP of $5.8 million (up 27%). These firms’ Revenue per Lawyer numbers (my favourite statistic) were quite something - $3.86m for Wachtell and $2.034m for Cravath.
The London based firms run to a 31 March financial year and have not yet reported but you can bet that they too will have had stellar years. The same will go for leading law firms in many jurisdictions.
These results were driven by a perfect storm of helpful factors:
But 2022 has ushered in a very different environment. Even before Vladimir Putin’s horrific invasion of Ukraine, concerns about inflation and slowing economic growth were weighing upon business. The invasion has massively added to macro-economic uncertainty. An early resolution to the conflict seems highly unlikely and increasing sabre-rattling between Russia and the West is very alarming. A Third World War, whether triggered by accident or design, is not unthinkable.
So, it is not surprising that M&A activity is down. The first quarter of 2022 yielded $1trn of deals worldwide, down 23% compared to 2021 (with the number of deals down 19%). Capital markets activity collapsed after a strong January and global IPO volumes for the first quarter were down by 37% compared to the equivalent period in 2021.
At the same time law firms are facing increasing costs. The Great Resignation has driven big pay increases, partners have returned to the skies in pursuit of mandates and energy and other overhead expenses are on the up.
All this surely means that law firm leaders will be scratching their heads. Can we preserve the ground we made in 2021? We really don’t want to be reporting reduced revenue or profit next year. But there are only so many deck chairs to burn so what are the levers which we should be pulling now?
There is good advice here from Alison Krauss and Robert Plant. You Can’t let go…
I would hazard 6 areas of focus.
It’s obvious of course but all firms will be looking in tougher times to sustain or increase the top line. There are a number of strands to this, including:
Remuneration structures are designed, in many different ways, to incentivise partner contribution. But they can be:
It is in the nature of law firms that the higher profile practitioners tend to be chosen for practice or firm management positions. This is often less than ideal both because these individuals can have punchy personalities and not be not natural “people people” and because they are distracted from their “highest and best use” of legal work by management duties.
It follows that there is much to be gained by identifying early in their careers potential future ‘managers’ within the partnership - even if not rainmakers - and, with subtlety (so as not to discourage others), helping them to develop their management skills and navigate them into positions of responsibility within the firm where they can develop (or not!) their skills and achieve profile with partners.
More and more corporates are embracing the importance of a clearly articulated Purpose, underpinned by values, in giving shape to strategy and connecting with stakeholders. I have just been reading the Annual Report for Severn Trent, the water company. They are led by the purpose of “taking care of one of life’s essentials”, underpinned by values of courage, curiosity, pride and care, which results in (as they describe) nine strategic outcomes. It matters, it has impact.
Purpose is also important in the world of Big Law. In this post-Covid world many people are asking themselves what is really important in life and this has been a major factor in the Great Resignation (which saw a staggering 47.8 million people voluntarily leave their jobs in the USA in 2021). Law firms have struggled to hold on to, and recruit, talented lawyers and business service team members. So having a purpose – one which excites, and is more than enriching the partners - is important glue, an important motivator.
As my friend Charles Wookey from Blueprint puts it:
“the goal of law firm leaders is surely to make their people feel that they are a valued member of a winning team on a worthwhile mission”.
Purpose and values also matter increasingly to clients. As clients develop their commitment to environmental change, diversity and social advancement, they need to feel that their law firms “get it”. And, of course, many clients are including social and diversity requirements in their panel terms.
Few law firms currently articulate their purpose but more are doing so. I see, for example, that Freshfields have “Empowering tomorrow” as their purpose. I know that many in the legal world are sceptical but, in an environment where keeping your best people and convincing your clients that you care about more than PEP, it will count.
Purpose and values are also the doorway to culture which is, as described by Jason Furlong in an article on Law.com:
“the daily manifestation of the firm’s explicit performance expectations and its implicit behavioural norms - what is rewarded, what is tolerated, what is overlooked and what is punished… As a general rule the lower someone sits on the organisational chart, the more accurate is their perception of the firm’s culture…The partners wax rhapsodic about how wonderful it is to work there. But if you want to get closer to the truth, go ask the law clerks, the administrative assistants, the marketing personnel, the IT folks and the person who cleans up themes in the kitchen every morning?”
This last point is critical and it reminds me of a quote from the great Tim Minchin:
“You may be the most important cat in the room, but I will judge you by the way you treat the least important.”
In more straightened times client loyalty and support will be even more important. Now would be a good moment to organise a series of live interviews with a range of clients to test, after two remote years, what they really think of the firm. Ideally these interviews would be conducted by a third party who is independent of, but has a good knowledge of, the firm as interviewees are more likely to be candid.
Top three questions might be:
Staff costs will be by far the biggest overhead for all firms (38% of net income of the Top 10 UK firms which contributed to PwC’s interesting 2021 UK Law Firms’ Survey). Given the ongoing, if slightly calmer, war for talent it would seem unlikely that firms could realistically trim those costs even in a slowing market. Of course, if there were to be a serious slow-down some will not be shy to look at redundancy programmes (although memories are long and firms need to approach this topic with great care).
In relation to office space, something interesting is happening, at least in London:
A buildings. The running costs of offices are, in addition, likely to rise as energy costs go up significantly.
Firms will also be focussing on their IT infrastructure although migration to the Cloud and use of Software as a service has moved at pace over recent years and offered firms savings and efficiencies. Cyber security will, however, need be even more of an obsession than hitherto as the war in Ukraine drives spiralling cyber risk.
Can law firms have charisma? I think they can.
The Cambridge Dictionary defines as “the ability to attract the attention and admiration of others”. Well, law firms can do that - particularly if they are differentiated and interesting.
So, with apologies for returning to a theme which I’ve burdened you with in the past, tougher times will increase pressure on law firms to explain why they are different and charismatic. Where is the “soul of our soul”, what excites us, what luxury object would we take to a desert island, what is the one knock-out point which would persuade the perfect candidate to choose us over all other firms?
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