The 1% are getting richer: The Global Elite
In 2017 average profit per partner among the AM Law-100 firms rose 6.3%. The top-10 firms saw an increase in PPP of 8.4% while firms 54-100 saw an average PPP growth of only 3.4%. When we take the 10 largest firms out of the statistics, profit growth for the remaining 90 firms would be 4.6%. We have not seen this sort of uneven profitability growth in the years before.
The firms at the top, the Global Elite, are a league of their own. They effectively only compete with each other. They’re hired for the most complex ‘bet the farm’ matters where price is not a major consideration for the clients. This league is not competing with Alternative Legal Service Providers, the Big Four or the in-house legal department. They are in fact not even competing with other law firms as they operate in a separate segment of the market.
Attracting superstars
These Global Elite firms have the ability to attract superstars. The best performing partners are drawn to the best performing firms, making them even better. In this respect law firms have started to be much like premier league sports teams: the teams that can pay the higher salaries will attract the best players and will be more successful in the competition and thus attract more income from sponsoring, broadcasting rights, merchandise and ticket sales. The same has become reality for law firms.
"The Global Elite operates in a separate segment of the market"
You need to have a seat at the table to get a seat at the table. Mega transactions and high stake litigation are only awarded to partners who have done that type of deals and engagements before. Without the money to pay superstars the rest of the firms are not able to attract prestigious high-end work and thus they don’t develop a track record and thus they will never get this type of work. It is just a vicious circle.
Lateral ‘star’ hires are paying off for Kirkland & Ellis
The big winner over 2017 seems to have been Chicago based Kirkland & Ellis. (1,997 lawyers, 504 non-equity partners, 388 equity partners, 8 US offices, London, Munich, Beijing, Shanghai, Hong Kong). With a total revenue of $3.165 billion (yes billion) this year’s largest firm by revenue in the world. Its gross revenue has grown 57 percent since fiscal 2013, while its head count increased 28 percent and its profits per partner rose 43 percent. Last year Kirkland added $514 million in organic growth (no mergers). Kirkland managed to achieve a very healthy profit margin of 58%.
The firm has clearly benefited from its effort over the last few years attracting star partners in high-rate practice groups such as M&A, Private Equity and high-end litigation. MergerMarket data shows that Kirkland has advised on 489 transactions in 2017. More than any other firm. Kirkland also saw the largest increase in deal value (up 63.5% to $ 432 billion)
Kirkland operates an ‘eat what you kill’ system and is very individualistic and competitive, with a very big spread between the highest- and lowest-paid partners. Partners are paid based on their share value, which can fluctuate. Average partner compensation is $4,701,000.
Lateral hire Sandra Goldstein, a former leader of Cravath’s litigation department, will make a reported $11 million a year for five years. Former Kirkland partner Robert Khuzami made $11.1 million for work from late 2016 to early 2018, according to information in financial disclosures made public when he became deputy U.S. attorney in Manhattan.
One factor boosting Kirkland’s profitability is its huge non-equity partner class. (504 salaried partners vs.388 equity partners). Most of them don’t stay at the firm longer than five years. Associates make partner earlier than at most firms, after six years, and they generally work another three to four years before they find out if they’ll be selected for share status or must leave.
What about the other 99%: Your law firm
While the 1% are locked in competition with each other for high profit margin mandates, the 99% finds itself competing for commoditized work against hundreds of other law firms, the big-four, alternative legal service providers and in-house legal departments. The past year we have been lead to believe that law firms could be segmented in two groups based on size and profitability. The big size high profit firms were believed to outperform the group of smaller size and lower profitability. Analysis of the AM Law 100/200 data does not support this thesis. Growth and decline can be seen equally in both segments. There is absolutely no predetermination based on size and profitability. The only differentiator really is management.
"Strategy and management are the key differentiators for success"
Law firms operating outside the Global Elite segment need to radically adapt their business model to compete in this increasingly commoditized high competition segment of the market. Contrary to popular belief today’s position is not destiny. Rather than a divide defined by size and profitability, the key differentiator is to have a clear strategy and the ability to assertively manage lawyer numbers and costs. This is something I already predicted in my book Death of a Law Firm (2015).
What about the clients?
Overall Gross Revenue of the AM Law 100 grew by 5.5%. This indicates that clients have spend a staggering 4.7 billion more on legal fees with these 100 firms alone. This does not even include budget spend at Alternative Legal Service Providers, The Big-Four’s legal services and the increasing number of matters handled by the in-house team. Still traditional law firms managed to increase client’s external legal spend.
In 2008 the Association of Corporate Counsel (ACC) famously launched ‘The Value Challenge’. In the decade that past literally thousands of General Counsel have been speaking at conferences and with their law firms reiterating this same message: “we want better value, prices must go down”. Procurement got involved and law firms were put up with complicated and elaborate RFP’s and legal panel formations.
"Clients focusing on efficiency will be a game changer for the legal industry"
The figures show that despite all efforts clients have not been successful in pushing down external legal spend. Based on the research for my new book ‘Data and Dialogue, a relationship redefined’ (co-authored by Vincent J. Cordo Jr), I strongly believe this is about to change. Clients have learned the hard way that focusing on the hourly rate does not get then anywhere. The focus is shifting towards ‘efficiency’ and the first results are outright spectacular. Savings of 25% are possible without any compromise on service or quality. Watch this space for more articles on this topic that will be a game changer for the legal industry.