Bodycount

The glowing reports of law firm profits that have occupied recent headlines may make it seem like the legal industry is returning to the “Way We Were” in the pre-2007 Golden Era, and everyone can breathe easy. 

Here’s a sampling of those headlines: In 2010, Fried Frank’s profits per partner surged 28% to $1.6 million.  Gibson Dunn’s average profits per equity partner rose an astounding 20.9% in 2010 to $2.31 million.   At King & Spalding, equity partners took home 18% more, an average of $1.73 million in 2010.  Sonnenschein Nath & Rosenthal (now SNR Denton) saw profits per equity partner jump 15% in 2010.  With only slightly fewer percentage points, DLA Piper‘s U.S. profits per partner jumped more than 12%.   Overall in 2010, profits per equity partner rose 7.4%.

Wow!  Sounds like at least the big dogs are back in deep clover.

It should be noted, however , that those increasing profits are inversely related to the law firm bodycount — of staff, lawyers and even equity partners.   The 2008 cuts were in many cases long overdue and represented a prudent shearing of excess capacity that could no longer be supported when the money hoses were pinched. 

The self-congratulatory back-slapping may be premature.  The cuts are back.  Tom Huddleston, reports in today’s AmLaw Daily that legal jobs dropped by 500 in March after 2,000 positions were lost in February.  The cuts represent the second straight month of losses, and the fourth out of the past five months.  These cuts comport with Dan DiPietro’s prediction that more trimming will occur in 2011, and please note that he is “watching equity partner head count closely.”  This all may signal continuing erosion of the high-leverage model of law firms.

While it may be a hard time to read the tea leaves, I would welcome your thoughts on where the trends in the legal industry are taking us.

© 2011, Edge International US, LLC.  All rights reserved.  No part of this post may be copied or reproduced without the express permission from Edge International US, LLC.

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3 Responses to Bodycount

  1. Brian Rogers says:

    Pam: From conversations with in-house attorneys in my own legal market of St. Louis, Missouri, I wonder whether law firms will see the greatest competition from their own clients as companies keep more work in-house. If so, I would expect lower-end work to be the most vulnerable to loss, as it doesn’t require the depth of specialization that is one of the greatest hallmarks of the large law firm.

    I also think the time is ripening for a surge in technological innovation in legal services. So much of what we do as lawyers could be done much more quickly and inexpensively–and with a higher quality–if the technology that is already available were more widely and deeply adopted. The question in my mind is whether such innovation will occur in law firms, whether it will take place in corporations, or whether non-lawyer vendors will find a way to do more of what lawyers currently do without “practicing law” under unauthorized practice of law statutes.

    Brian

    • pwoldow says:

      Brian: You raise some really important and tough issues. In the last few years, we have seen in-house counsel cherry picking amazing service lawyers who have been “let go” from firms. In so doing, the law departments have enhanced their capabilties to handle not only more work but sometimes more sophisticated work that was being sent to outside counsel. In addition, lots of routine work is being channeled to regional firms, virtual firms and offshore legal processors. So, not only is lower-end work vulnerable, but mid-range work is too.

      With the overall demand for outside counsel services having diminished, firms must reassess how much work they can reasonably generate and what types of timekeepers are needed to service the work. As you point out, we are sitting on the precipice of technical innovation. In case you did not see it, the New York Times penned a thought-provoking article on this subject, Armies of Expensive Lawyers, Replaced by Cheaper Software, http://www.nytimes.com/2011/03/05/science/05legal.html?_r=1 .

      I can’t wait to see who will get to the gate first – firms. law departments, LPOs or some other creative choice. Thanks so much for your thoughts.

      • Brian Rogers says:

        Pam: That’s a great article. Thanks for sharing the link. When I see what technology can do and then think about my own observations of how legal services are performed, I think something has to give because there’s too wide a gulf between how we work and how we could be working.

        There will be winners and losers as the landscape changes to be sure; that’s always the case when disruptions occur. Whether innovation will cause a decrease in the demand for lawyers is an interesting question, but I don’t think it’s obvious that demand will decrease over the long term. One development that could sustain demand for lawyers is the coming to life of latent markets. As providers learn to deliver legal services better, faster, and cheaper, opportunities will open up for legal work that currently is not being done at all because it’s cost prohibitive or, in some cases, because the added hit to cycle times caused by legal review is not worth it. It’s quite possible that a tidal wave of demand will be released as improvements in process and technology allow innovative legal services providers to change substantially the value proposition they offer.

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