The Future of BigLaw, Part 1 – The Numbers Don’t Lie, or Do They?
It’s easy to be a little confused about the state of BigLaw today. Some commentators are preaching doom and gloom, e.g., Noam Scheiber of the New Republic in “The Last Days of Big Law – You can’t imagine the terror when the money dries up,” and his follow-up, “Yes, Big Law Really is Dying – Dear Lawyer: It’s Not You, It’s Your Profession.” In the former, Scheiber writes:
There are currently between 150 and 250 firms in the United States that can claim membership in the club known as Big Law, the group of historically profitable firms that cater to the country’s largest corporations. The overwhelming majority of these still operate according to a business model that assumes, at least implicitly, that clients will insist upon the best legal talent instead of the best bargain for legal talent. That assumption has become rickety. Within the next decade or so, according to one common hypothesis, there will be at most 20 to 25 firms that can operate this way—the firms whose clients have so many billions of dollars riding on their legal work that they can truly spend without limit. The other 200 firms will have to reinvent themselves or disappear.
But others, looking at the most recent revenue and profit numbers, argue that Scheiber is being an alarmist, and that BigLaw is chugging along quite well, thank you, e.g., The AmLaw Daily’s “Don’t Bury Big Law Just Yet,” and The National Law Journal’s “Revenues Up at Larger Law Firms:”
Take the latest results from The Am Law 100 for 2012. The 100 biggest law firms, ranked by their gross revenue, continued to post revenue and profit gains even as the U.S. economy sputtered. Revenue at these firms grew 3.4 percent, or $2.43 billion, to $73.4 billion—a new record—last year. Average profits per equity partner rose 4.2 percent, to $1.47 million on average, as firms kept their partner head counts flat in 2012. Profit margins, meanwhile, stayed at 38 percent.
[T]he giant law firms in this country are alive, well, and rich. Rumors of their demise are greatly exaggerated.
(Quotes from Don’t Bury Big Law Just Yet.)
So what gives? According to the above numbers, isn’t it a bit premature to be chiseling BigLaw’s tombstone.
Hey, but wait a minute, didn’t none other than Adam Smith, Esq. recently proclaim that “Growth is Dead?” Uh, Bruce, how in the heck is growth dead if revenues and profits are rising? Dude, not cool. Huh? What? Oh, whew, Bruce himself just explained this little conundrum in “CAGR for Dummies.” CAGR (for us dummies) is short for “Compound Annual Growth Rate.”
Channeling his namesake, Bruce critically analyzes the same numbers provided in the “Don’t Bury Big Law Just Yet” article that found BigLaw “alive, well and rich,” and instead reaches a quite different conclusion:
In other words—adjusted for headcount growth and in constant dollars—the AmLaw 100 were not even holding their own during the 2009—2013 period. Indeed, their revenue growth rate would have needed to be 23% higher than it was just to keep even with inflation and headcount growth.
As expected and predicted, starting one year earlier makes the picture even uglier. Now, rather than needing to have grown their revenue 23% more than they did (2009—2013), firms would have needed to have grown their revenue 69% more than they did simply to “stay even” over the 2008—2013 period.
If this is resilience and growth, then I should have been a professional athlete; I could count on the bar being lowered every year and still be able to set annual records at the new diminished height.
But if you want to generalize? Out of “alive, well, and rich,” the evidence seems to support one for three.
So, who is right in this battle of the heavyweights? Adam Smith, Esq. and the New Republic, or the pundits over at The AmLaw Daily and The National Law Journal? Dammit, is growth dead, or isn’t it? It’s time to pick sides people, and I’m siding with Bruce and Noam, not only because they are smart dudes, but also because Barry M. Wolf, the executive partner of Weil Gotshal, reached the same conclusion preceding their recent layoffs:
We believe that this is not just a cycle but that the supply-demand balance is out of whack across the industry. If we thought this was a cycle and our business was going to pick up meaningfully next year, we would not be doing this. (quote from NYTimes’ DealBook.)
Thank you, Adam Smith, Esq., for providing a cogent and deeper analysis of those “funny numbers,” thereby clarifying the apparent contradiction of what most see – BigLaw in big trouble – with the false mirage of “growth” being espoused by the BigLaw faithful.
Note: While I was putting the finishing touches on this post, Dr. George Beaton just weighed in on the issue with his own great insights in “Danger in being part of the BigLaw establishment.”
And now, Liam Brown, the founder of Elevate Services has entered the ring with “Big Law – the Empire’s Last Days or the Great Game’s New Rules?”
Great stuff – no matter what side your money is on.
In Part 2, I will discuss BigLaw’s woefully inadequate response to the post-Great Recession world, and the likely ramifications of such actions.