Law firms - when the tide goes out?

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:

  • a very buoyant M&A market, with $5.8trn of deals worldwide;
  • prodigious capital markets activity;
  • a busy environment in disputes, investigations and regulatory matters;
  • lower expenses as travel, entertainment and business development were massively constrained; and
  • firms’ ability to increase fees given the high demand.

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.

1. Revenue

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:

  • Winning more work from existing clients. We do the M&A, competition and employment work for Blue Skies PLC but not their disputes work. How can the relationship partner organise the right kind of introduction for the disputes team. What ideas can they bring to the table, maybe based on analysis of past cases lost by the company, to impress the General Counsel?
  • Winning new clients. Are we creative and organised enough in the pursuit of new clients? Who are our Top 10 Dream clients and how best can we demonstrate our talent and, critically, our hunger? We would love to work with BP. We have a team of three partners (infrastructure, financing and regulatory) who have done the homework and have some novel ideas around energy transition at BP. Can we tempt the General Counsel to a two hour brain storming session, no charge of course?
  • New practice areas or lines of business. Firms are, for example, increasingly promoting their ESG practices - but are the propositions a bit by numbers? The war in Ukraine has emphasised that ESG is not a thing given that defence-spending is no longer seen as inherently bad and hydrocarbons will have more of a medium-term role to play than might have been admitted before the conflict. Can thoughtful advice and insight from law firms encourage clients to focus on the constituent parts of the ESG agenda that are most pertinent to them?
  • Laterals and M&A. Whilst lateral recruitment and the acquisition of a smaller firm can clearly be high risk (not least for unsettling the existing team) it can be a smart way to plug a gap or bolster an under-weight practice area. Many firms have well-oiled lateral machines these days and some manage to secure tactical advantage by recruiting stars from key competitors.
  • Raising rates. In 2021 standard hourly rates in the United States increased by 6%, assisted no doubt by a tight market for legal services. As inflation increases firms will no doubt look to raise rates in 2022 but surely client recoil will be greater in a market which is likely to be more favourable to clients. Which takes you back to the perennial challenge of promoting alternative billing strategies. Fixed fees, blended rates and premium/discount arrangements are familiar but could you come up with something novel - a 5% increase in fees with a particular client, for example, conditional upon certain diversity or environmental metrics being met?

2. Maximising partner contribution

Remuneration structures are designed, in many different ways, to incentivise partner contribution. But they can be:

  • distracting, both in terms of, often senior, partner time which goes into the periodic evaluation exercise and in terms of week in/week out partner stress - will I get origination credit or deal credit or some share of both (or either)?
  • demotivating for many, who will be more concerned about relativities than absolutes. Why is my peer, Jane, earning £250 more than me? As Theodore Roosevelt said “Comparison is the thief of joy.”
  • I am not so naive as to think that firms should revert en masse to lock-step, although I do think that it can work powerfully for firms that are (or are nearly) single-jurisdiction firms. But lock-step aside, I have three suggestions:
  • remuneration structures should be as simple as possible, remembering that Leonardo Da Vinci taught us that “Simplicity is the ultimate sophistication”. In this context, many partners to whom I talk say that, despite all the nuts and bolts, billings are the only thing that really count in rem outcomes. The challenge for law firm leaders is to curate a readily understood system and environment in which collaboration genuinely counts, and is accepted as counting, as much as billings;
  • so called “black-box systems”, where individual partners cannot see what their fellow partners earn, are better. Partners will know broadly where they stand in the firmament without being burdened with the knowledge that they are valued a bit less than Buffy, Lizzie or Bertie; and
  • annual partner review sessions should focus on the 10 percent more principle. We can all find that extra 10 percent and, across the partnership, that is fantastic!
  • The other key to maximising partner contribution is thoughtful succession planning.

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.

3. Culture, Culture, Culture

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

“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.”

4. Clients, clients, clients

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:

  1. what has gone well over the last couple of years and what has gone less well?
  2. on a scale of 1 to 10, how likely are you to recommend it to your friend, Joan Wasser, who rings up asking for advice as to who should defend her multi-billion pound media empire against a takeover offer from Spotify?
  3. what one piece of advice do you have for the managing partner?

5. Overheads

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:

  • on the one hand we read that Clifford Chance is looking at significantly reducing the amount of space it has in Canary Wharf in light of the, probably irreversible, move to hybrid working. On the other hand a report from Knight Frank in March tells us that law firms took more than a quarter of the office space leased in the City of London in 2021 (50% up on the space taken in 2020 and 85% up on 2019);
  • the report goes on to explain that a lot of this is about firms looking to “trade up” rather than increase their space. Firms are moving out of older offices both to help talent retention, through providing a nicer working environment, and with a view to hitting net zero targets by being in more sustainable buildings;
  • all of which suggests, rather counterintuitively, that firms will not be able to save much in real estate overhead (notwithstanding much more working from home) and may indeed face increased expense to acquire and fit out space in grade

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.

6. Charisma

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?

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

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