Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at how law firms can use their increasingly lucrative equity shares to retain talent. Sign up to receive this column in your inbox most Thursday mornings.
It’s worth taking a step back to remember just how far the Big Law market has come from a year ago.
Through nine months of 2020, Big Law had gotten through a recession, and many firms came out on the other end with more work than they ever anticipated. A Wells Fargo survey of some of the top 50 firms said revenue had grown nearly 8% through nine months of 2020 compared to 2019.
It was a surprise. Managing partners breathed a sigh of relief.
What a quaint time that was!
Now, everybody is worried they can’t find enough associates to do all the work and they are fretting over paying salaries that are higher than ever.
Existential questions are being asked about the relationship between associates and law firms. Will they keep moving around? Will they ever come back to the office? Will there be a glut of lawyers when the wave of transactional work recedes?
Focus too much on these questions and people might forget something important: It’s never been a more lucrative time to be a Big Law partner.
The immense success in 2021 can go a long way toward solving retention problems looming over today’s market.
On Tuesday, Wells Fargo said its survey shows the top 50 firms pulled in 17% revenue growth compared to the year-ago period. If that holds for the full year, the 50 largest firms will be within shouting distance of a $100 billion market. The top 50 firms last year brought in a little more than $82 billion, according to AmLaw data.
The value of a Top 50 partnership is set to expand by even more.
Wells Fargo said the top 50 firms’ net income rose 27% through nine months this year. Apply that over a full year, and the profit pool for the group could grow by $10 billion. In 2020, the top 50 firms had net income of nearly $37 billion—split up between a group of about 13,650 equity partners, according to AmLaw data.
There’s an obvious way to incentivize lawyers to stick around: Give more of them a direct stake in the firm. The value of a Big Law share is higher than ever. Why not spend it on your own people?
Limiting the number of equity partners has long been a popular way for law firms to juice their profits per equity partner statistics. Without even commenting on the implications to associate morale resulting from that trend, it’s not a sound business strategy in today’s market.
Last year, 18 of the top 50 firms diminished the size of their equity partnership, AmLaw data show. Of those firms, only two experienced a decline in net income—arguably the best reason to shrink a firm’s equity tier.
On average, the profit pool at the 18 firms grew by 6%yet their profits per equity partner surged more than 16%, due to the pie being split between fewer partners.
Law firms should avoid this strategy this year and opt instead for a more inclusive approach. They should expand their equity tiers to more lawyers who, after all, have earned it. They are working harder than ever before.
Expanding the equity tier will be a much-needed sign to lawyers that sticking around will be rewarded.
Worth Your Time
On Litigation Finance: Valerie Bauman and I reported a deep dive into a litigation finance firm, Pravati Capital, that has a history of litigation with its own clients.
On Silicon Valley: Cleary officially launched in Northern California, hiring a WilmerHale antitrust litigation partner and moving a handful of existing partners to Palo Alto and San Francisco.
On In-House Moves: The Jacksonville Jaguars have a new general counsel and PayPal Holdings Inc.'s legal chief is departing at year’s end with a notable message. “None of us are maximizing our potential if we continue in the same role forever,” Louise Pentland wrote in a LinkedIn post detailing her decision.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.