After reading Jordan’s interesting post on Why do law firms exist?, I received my annual copy of the AmLaw 100 rankings. The two events lead me to analyze the factors driving profitability of law firms.
Jordan’s post, among other things, noted that firms: “manage production and process indifferently, and share knowledge haphazardly and grudgingly.” These comments suggest firms are all over the board in how they operate and manage their work. So I analyzed the AmLaw 100 listing with an eye towards spotting trends in what makes a firm profitable.
As I have previously noted, leverage can have a strong impact on profitability, since it is non-partners who generate the profits that go in partners’ pockets. Yet leverage amongst this list does not correlate well to profitability. Size didn’t matter either (sorry about that one). The only strong correlation I found was between “Revenue per Lawyer” and profits (be it PPEP or Profitability Index).
This tells us two things:
1) Jordan’s assessments are likely spot on. The haphazard way in which firms are managed and run is reflected in the AmLaw 100 profitability stats. How a firm is structured and run does not seem to impact profits.
2) Revenue per lawyer matters. However, this likely reflects the old way and not the new normal. Revenue per lawyer is based on billable hours, at least for now. So the old adage of more hours billed and collected equals more partner income was still in effect in 2010.
My Assessment: The new normal did not catch up to most law firms in 2010. However, Jordan’s question appears to be persistent and expanding in the market. Even with the economy doing better, clients continue to ask hard questions of their law firms and maintain pressure on reducing fees in a sustainable way. 2011 may well be an inflection point year in this process.
  • Ben A.

    Confused. What do you mean by "revenue per lawyer is based on billable hours," and how do you know that?

    According to AmLaw, revenue per lawyer "is calculated by dividing gross revenue by the number of lawyers." How does that anchor it to billable hours? Sure, much of that revenue will have come from billable hours (is this all you mean?), but that's certainly not explicit.

    However revenue comes in — flat fees, contingency, billable hours — revenue per partner is simple arithmetic. Maybe I'm missing your point, but how do you end up assuming that the numbers don't reflect the "new normal?" And how will you know when they do?

  • To Ben's questions – The most optimistic survey I have seen is that 20% of AmLaw revenue is from non-hourly billing. Most other surveys put it at around 15-16% and that would include contingency fees which have been around a while. So the mass of AmLaw 100 revenue comes from billable hours.

    Even though the RPL number comes from Gross $ – # of lawyers, it really is a reflection of the dollars in the door from each billing lawyer. The purpose of that number is to show on average how much revenue each billing lawyer generates.

    My conclusion is drawn in-part from that historic treatment of the RPL number. Frankly I was hoping there would be other correlations showing the new normal was here. But I just didn't see them.

  • Very interesting figures Toby, thanks for sharing the post.

  • Ben A.

    Thanks, Toby. I think that makes sense.