Big Law’s Surprisingly Good Numbers Hint at Possible Great 2024

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at the financial results for law firms in the first half of the year—and what’s next. Sign up to receive this column in your Inbox on Thursday mornings.

Big Law firms defied expectations to report a strong financial performance for the first half of the year—and the closing months could even be busier.

Strong demand buoyed first half results, even as transactional practices have yet to fire on all cylinders. It’s that financial engine—if it revs up—that could lead to a busier back half.

Revenue rose an average 11.4% for all operations compared with the same period last year, according to a survey by Citibank’s law firm group.

Hours worked, or demand, rose 2.9% and fueled the growth, unlike past increases driven almost exclusively by rate increases, the Citi unit reported. The country’s 50 largest firms performed best, growing demand 3.3%.

The figures represent the best first half since the surging legal market of 2021, when revenue grew 14.6% and demand for the top 50 firms grew 9.4%, Citi found.

Law firms entered the year having incorrectly predicted that transactional markets would come alive in the second half of 2023. Most leaders were preparing for high interest rates and fearing that could have its typical effect: a recession. Some were even predicting law firm layoffs this year.

Instead, the economy proved resilient, powering corporate legal spending and allowing for another year of strong rate increases. Law firms have largely averted layoffs.

Among the top 50 firms in the first half this year, 68% reported demand growth, Gretta Rusanow, head of advisory services for the Citi group, said in an interview. Of that group, 29% reported increases greater than 5%.

“It’s going to be a very positive year,” Rusanow said. “There is a lot of good news from an activity standpoint.”

Practices such as litigation, investigations, antitrust, and work related to funds and investment management practices drove the demand growth, Rusanow said. While transactional activity has picked up from the doldrums of the past two years, it remains below the levels firms would like to see.

That could change if the Federal Reserve delivers on Citi’s projection of three interest rate cuts before the end of the year. Rate cuts are likely to spur more transactional activity, meaning the end of the year could be even stronger for Big Law.

“I anticipate just in absolute terms a continuing improved environment through year end,” Rusanow said.

One caution: The comparisons to last year will become more difficult the rest of the year, since the second half of 2023 was a stronger period of growth. There’s also the possibility that transactions will slow as the US presidential election approaches. But Rusanow said the election can create pent-up demand for deal work that will pick up once the results are known.

So far, law firms are indicating that the third quarter has started strong. Citi polled 23 large firms recently and more than 40% of firms said third quarter demand had so far exceeded levels from the second quarter, Rusanow said.

“The vast majority of them are saying at a minimum it’s the same if not better,” she said.

Rusanow and her team have more access than most to law firm leaders and the thinking of those leaders on major topics. So, I asked her about two other trends: The Big Law talent war, and law firms’ adoption of generative AI tools.

Talent War

For law firm leaders, a strengthening financial environment will only serve to increase the war for talent, Rusanow said. The most profitable firms are likely to use that success to branch out and hire more partners.

“There is very clearly a trend of firms who have outperformed the market and are leveraging that to continue to strengthen their position,” she said.

The surge in competition has driven some firms to boost their top-end partner compensation or to redesign their leverage structures by adding a tier of income, or salaried, partners.

A desire to retain senior associates drives the addition of those new partner tiers.

The tiers, rather than being filled by former equity partners who’ve been stripped of equity, are now a testing ground for highly motivated, successful senior associates. Those younger partners can be immensely profitable, carrying lower salaries while continuing to bill high hours.

“A decade ago, we would have probably shown income partners in general as a net negative contributor to firm profitability,” Rusanow said. “Things have changed now.”

AI Adoption

As I’ve written before, there’s two competing schools of thought on generative AI’s impact on Big Law. One is that it will cannibalize grunt work and decimate the ranks of associates. The other is that the broader adoption of AI throughout the economy will generate enough legal work that lawyers will stay busy even if some aspects of the job are made more efficient.

Rusanow said most law firm leaders she speaks with fall somewhere in the middle. New tools may make lawyers more efficient, allowing them to spend more time on more complex matters. But the adoption of generative AI tools across the economy will also generate new legal work.

“There’s a mindset across this profession that, yes, it might eliminate the grunt work, but it will also free up lawyers to do more interesting work in the process,” she said. “I am not negative about generative AI, nor do I sense that from the firms I speak to.”

For now, firms are testing out a flood of new tools coming to the market, many of which aren’t ready for prime time, she said. There may not be much change within the next two years, but Rusanow said firms don’t want to be caught flat-footed if there is a sweeping change over the next decade.

Still, just like her prediction for a strong second half of the year, she’s bullish on law firms.

“Whenever there has been a new technology wave, there’s a sentiment in the market that the robots are coming after the lawyers, and it’s going to eliminate huge chunks of work,” she said. “And I haven’t seen it yet.”

Worth Your Time

On Ropes & Gray: The Boston-headquartered law firm is looking to build an outpost in Paris, Rose Walker reports. The firm has plans to launch in the French capital with hires from rivals.

On Bankruptcy Ethics: A Texas bankruptcy court must reconsider whether ex-bankruptcy judge David Jones should have recused himself from a restructuring case before resigning amid an ethics probe, James Nani reports.

On Return to Office: Latham & Watkins is asking its New York lawyers to show up to the office four times a week starting in January, Meghan Tribe reports.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.