The always anticipated Am Law 100 numbers for 2016, released earlier this month, show an industry that may be growing oblivious to the myriad pressures that others are saying will eventually take its toll. Indeed, the release of these relatively strong marks — revenue growth up 4.3% (an increase of a full 150 basis points compared to last year) and profits per equity partner up by 3% — demonstrate, as The American Lawyer wrote, “results [that] were rather impressive for an industry facing a number of headwinds, not least of which was flat demand for their lawyers’ time.”
Of course, critics made a bit of hay about the dip in what the Am Law 100 has always considered its most reliable single indicator of a law firm’s financial health, revenue per lawyer (RPL). But even here the news was not dire: RPL still gained, though not as much as last year, 1.5% for 2016 compared to 2.6% the previous year. The numbers also showed that the percentage gain in lawyer headcount almost tripled in 2016, compared to each of the last two years.
For those — and they are legion — who have warned that large law is ignoring the pressures of tech innovation, heightened client desire for efficiency and lower cost, new legal service provider entrants and a changing legal workforce at their own peril, the new numbers were something of a surprise.
“These results — in the context of the way the world is going — are contrary to what would have been expected,” says Ralph Baxter, former chair of Orrick and chair of the Thomson Reuters’ Legal Executive Institute Advisory Board. “These are very favorable numbers and show that the most successful firms continue to do very well, and drive the averages to positive levels.”
While that’s good news in the short term, obviously, Baxter explains, it dampens firms’ perception of the need for change, even as the legal industry continues to evolve around them. “As profit per partner (PPP) averages of the largest firms continue to be robust, firms do not appear to be focusing adequately on needed changes to their business and service process models that will be necessary to meet the markets changing demands going forward,” he says. “They are essentially defying the pressures of the market for now.”
One issue may be the Am Law’s reliance on RPL or PPP as major metrics to assess the financial health of individual law firms and the entire industry. Numbers that feed into these measurements are largely self-reported and thus may be unreliable — something that too few industry analysts take into consideration.
“I wish the legal industry would break its obsession with PPP because it is a metric than can be manipulated and simply is not the best measure,” said Bruce MacEwen, of Adam Smith, Esq. and author of the new book Tomorrowland: Scenarios for Law Firms Beyond the Horizon.
Still, MacEwen says, the totals are impressive and continues to show the stratification of those large firms that are building on years of continued success to pull further away from the pack. Indeed, The American Lawyer wrote that the second leg of their roster, firms ranked #51 to #100, were facing “a crossroads” and urged them to concentrate on differentiating themselves to remain relevant.
MacEwen agrees. “There are out-performing firms and then there’s everyone else,” he says, adding that some of these changes in rankings are incremental and may be a case of just “digging the moat deeper.” He also agrees with Baxter that results such as these diminish the case that large law firms need to act now to ensure their survival in the changing legal ecosystem. “The innovation being done at many of these firms is next to nothing,” MacEwen notes. “But how can we expect anything different when there is no urgency?”
The static nature of the industry is something MacEwen addresses in his new book and observes that for the most part, the rankings of the top law firms in the nation have changed very little since the 1950s, two-thirds of a century ago! “And you don’t see that in any other industry — not auto-making, not cell-phone carriers, not retail,” he says. “It’s really incredible. but yet very unlikely to continue forever.”
Baxter concurs, and says that may be the ultimate take-away from the Am Law 100 numbers for 2016: Despite the robust profit numbers that may reflect a healthy industry at its prime, the legal world is changing, and no entity can prevail if it does not accept and adjust to that fact.
“The Corporate Legal Operations Consortium (CLOC) is continuing to ratchet up the pressure and clients are increasingly moving matters to other legal service providers,” he says. “Work is leaking away, and that pressure will continue — the next five years will see it increase much faster than it did in the last five.”