Wednesday, February 11, 2015

The BigLaw Gap Widens: Winners and Losers

As I have previously noted, one of the most controversial topics of debate and discussion among both lawyers and non-lawyers alike (for various reasons) is law firm profitability, and how many lawyers are perceived as overcharging their clients to engage in legal work.

An interesting article was published on Above the Law which discusses the current state of affairs in the American legal marketplace, among "AmLaw100" law firms.  It is aptly titled "The Imminent Capitulation of Many Big Firms."  This article comes on the heels of recent articles discussing how DLA Piper apparently shortchanged its associates on annual bonuses.

For readers not immersed in the terminology, the American Lawyer magazine publishes lists each year showing America's largest 100 law firms, based on gross revenue, as well as lists of the same firms broken out by average annual profits per partner.

Headcount of total lawyers is one easy to measure variable, so a local New York City-only law firm that has 500 lawyers and boasts $1B can be ranked "higher" on some lists than a law firm with 1,000 lawyers located all across the globe that reaps $500M in annual revenue.  Both firms would probably still be on these lists, but the lower grossing law firm would be ranked "lower."

A few "elite" firms, such as Wachtell, Lipton, Rosen and Katz have only 260 lawyers, including 79 equity partners, making $5M each.  Another such elite firm is Sullivan & Cromwell, which has 800 lawyers, with each of its equity partners making $3.5M each year.

These interesting metrics show that these top 10 "elite" law firms based on profits are pulling away from the rest of the pack, leading to a very, very short list of highly paid lawyers.

However, the rest of the large law firms are struggling to compete effectively for the day to day routine legal work of the large corporate clients.  The American lawyer calls these firms the "Giant Alternatives."  These firms are enormous but not hugely profitable: although they house almost 20 percent of the Am Law 100’s lawyers, they generate less than 14 percent of the revenue.

A big law firm in this vein is DLA Piper, which has approximately 4,200 lawyers practicing in more than 30 countries.  It has total revenue of $2.48B, but profits per partner placing it 54th on the list, with $1.3M in average profits per equity partner.  The world's largest law firm based on both revenue and headcount is Baker McKenzie, which has 4,200 lawyers in 78 offices, reaping over $2B per year.  However, its profits per partner place it 63rd on the profitability list.

So the world seems to agree:  The super-rich firms will become even more superbly rich, and the merely rich firms will lose ground. Where does that leave many big firms?  In a world of hurt.
Why is that?  Look at it from the perspective of a corporate client facing any Intellectual Property legal issue.  If that issue involves facing down Boies Schiller or Ted Olson in the U.S. Supreme Court, the client will need to hire the best lawyer available, whether she charges $1,500 or $1,800 an hour.

However, the vast majority of clients' day to day legal activities in the Intellectual Property arena are relatively routine, such as sending and responding to cease and desist letters, monitoring trademark filings, handling copyright licensing arrangements, etc.

These specialized but routine activities do not warrant paying $1,000 an hour for a partner whose firm maintain dozens of glitzy offices all around the globe.  These clients can look to small, boutique firms with the same experience and specialization but much lower overhead and billing rates to substantially undercut the Giant Alternatives.

And that is just one of the reasons why Giant Alternatives and their ilk are in for a world of hurt ahead.

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