Decline in Law Firm Profits Due to Hiring Overdrive Hinders Rate Increase, Study Shows

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According to a recent report by Wells Fargo & Co., law firm profits per equity partner fell by almost 4% last year due to the cost of hiring new employees. This led to a decrease in revenue, even though the overall revenue of significant law firms grew by 3%. Despite this, the profits per equity partner remain elevated from pre-pandemic levels after a 19% spike in 2021. The report also found that the number of hours billed per lawyer fell by 6% to 1,568, which is the first time the figure has fallen below 1,600 in the 15 years that Wells Fargo has conducted the report. The headcount of law firms grew by 4.5% as they hired new employees to cope with the 2021 surge in work.

Owen Burman, managing director of the bank’s legal specialty group, expressed concern about the excess capacity in the industry, saying that they saw several firms with low productivity levels that are probably not sustainable. He added that rate growth could only offset a certain number of hours. The drop in productivity came in what was otherwise a good year for major law firms, with hourly rates rising by nearly 6%.

The results align with expectations of a reset after a record-setting 2021 fueled by corporate practices that dried up for most of last year. Winston & Strawn chairman Tom Fitzgerald said that the 2021 corporate deal flow was completely atypical and unsustainable, and last year was much more consistent. There was a marked increase in litigation to fill that gap.

  

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Firms anticipate demand growth this year of 1.6%, which could equate to revenue growth of greater than 5% in 2023 if firms can push through the record rate increases they have projected. Law firms, including Goodwin Procter, Cooley, and Kirkland & Ellis, have trimmed their associate ranks as demand declined. According to Burman, this list could grow if demand doesn’t pick up.

According to Kay Hoppe, a veteran legal recruiter based in Chicago, managing partners have signaled that profits are likely to decline. However, top firms have remained bullish on their long-term plans and are still targeting growth. She added that top firms are not overreacting and that it’s not their first rodeo.

In conclusion, the report highlights the challenges law firms face in maintaining their profits despite the growth in revenue and hourly rates. The excess capacity in the industry and the drop in productivity are causing concerns, and firms are facing the need to trim their associate ranks if demand doesn’t pick up. Nevertheless, top firms remain bullish on their long-term plans and are still targeting growth.

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Law Profits Fall as Hiring Spree Dulls Rates Gain, Report Finds