This post was originally published by Content Pilot's Patrick Fuller on the Deductive Intelligence blog. This is the fifth year that he's published, through various sources, his take on the AmLaw 200 trends.
The 2013 AmLaw 200 was released in early June, and to borrow a line from Led Zeppelin, the song remains the same. Numbers, data, and statistics do not subscribe to, nor push, any specific ideology, but they sure can tell a fascinating story.
First, a quick disclaimer. This is very much a macro analysis, and therefore will deal in some generalities. To be very fair, there are firms that are included in various segments that are both outperforming that segment, or conversely, underperforming against their immediate segment. While I will normally refrain from naming individual firms, it's easy to look at firms like Irell & Manella, Munger Tolles, Williams and Connolly, or Cahill Gordon (to name just a few) that are in the "bottom 150" of the AmLaw 200, but are clearly outperforming the averages for that segment.
With that said, we'll stay with the classic rock theme and kick off the analysis with a nod to the band with a law firm name, Emerson Lake & Palmer:
Welcome back my friends to the show that never ends
We're so glad you could attend
Come inside! Come inside!
Year-Over-Year Quick Observations
First, let's look at the KPI's (Key Performance Indicators) from 2012 and 2013 to see where the changes took place.
To give some perspective of the breadth and depth of change over the past 10 years, I've included the 2003 number as a point of reference, and will address the 10 year trends in greater detail below.
The total collective revenue growth for the AmLaw 200 was outpaced by the net operating revenue by a little more than half a percentage point. Total collective revenue was nearly $92 Billion, and net operating income as essentially doubled since 2003, finishing 2012 just shy of $35 Billion.
All segments posted FY 2012 revenue gains over FY 2011, with the bottom fifty firms (numbers 151-200) collectively well off the growth pace of the AmLaw top 150.
Like revenue, total headcount was up across all segments, with the bottom 150 showing the most growth. A closer look at the numbers, however, reveals a stark contrast in growth over the past 10 years. While the top 150 has seen considerable growth in their total headcount, the bottom 50's 2012 bump actually pushed them back over their 2003 average.
Equity Partner headcount was a different story. The only segment showing growth was the middle 100, with top and bottom 50 each decreasing by roughly 2.5%. Once again, the bottom 50 is back below their 2003 equity partner average.
Profits Per Equity Partner saw a solid 3% overall gain in 2012, but the number was driven by the nearly 11% growth of the AmLaw top 50. Since 2003, the AmLaw top 50 has doubled their PPEP, with the other segments well behind the growth curve but still posting solid gains over the past decade.
It should be noted that this is the first year since 2009 that the AmLaw top 50 had collective growth in both PPEP and RPL. In FY2012, the AmLaw top 50 was the only segment that saw their RPL increase over FY 2011. As has been mentioned previously, strong Q4 collections may have contributed to the resurgence of the AmLaw top 50. According to Mark Medice, Senior Director & head of Peer Monitor, collections for all monitored firms in Q4 2012 was up over 9% from the previous year. Medice also mentioned that the strong 2012 Q4 collections had a substantial impact on the soft Q1 2013 revenue.
A Decade of Trends
As mentioned above, the overall collective revenue of the AmLaw 200 continues to rise, climbing 84% since 2003 to an all-time high of nearly $92 Billion. Only once in the past 10 years has there been a dip in revenue.
As strong as the revenue growth has been, the collective net operating income has been even more impressive, increasing 98% since 2003.
It is also not surprising that the number of Billion dollar per year firms has increased as well, and over the past decade we've seen a 900% increase in the number of firms generating more than $1 Billion per year in revenue, with 4 of those firms topping $2 Billion annually. This can be explained, in part, because of the number of lawyers generating revenue. In 2003, the average size of these 20 firms was 1,153 attorneys. In 2013, the average size for these firms was 1,773 attorneys, a 54% increase in 10 years. Only two of the billion dollar firms - Sullivan & Cromwell and Wilmer Cutler - are listed on the AmLaw 200 as having fewer than 1,000 attorneys.
Overall, the average headcount for AmLaw 200 firms has increased 29% in the last decade. The AmLaw top 50 have seen their firms grow nearly 40% during this period, whereas the bottom 150 has seen more modest growth, growing at roughly half the top 50 pace (19.6%). Mergers, geographic expansion, and lateral hiring increases are all factors in the trends on both ends of the spectrum. As we saw above, the average size of a firm in the bottom 50 of the AmLaw 200 has stayed relatively the same over the past 10 years.
The trends around Equity Partner growth continue to be more stable for the bottom 150 compared to the top 50. While the growth of the top 50 is roughly 17% since 2003, or slightly less than half of their overall headcount growth, the bottom 150 are also increasing their Equity Partner numbers at half the pace (9.8%) of their headcount growth (19.6%). Overall, the AmLaw 200 has seen the number of equity partners increase 13% since 2003 against overall headcount growth of 29%.
After three consecutive years of declining Revenue Per Lawyer (RPL) trends, the AmLaw top 50 bounced back in a major way in 2012. As noted previously, this is due, in part, to stronger than normal collections in Q4, according to Mark Medice from Peer Monitor. Since 2003, the AmLaw top 50 has seen their RPL grow 51%, while the bottom 150 have seen a 36% increase in RPL. The collective AmLaw 200 average for the last 10 years is 40.4%.
In terms of Profits Per Equity Partner (PPEP), the AmLaw top 50 have an advantage here, as well. Since 2003, this segment has grown their PPEP an astonishing 93%, although not at the same level of consistent growth that some might prefer. The bottom 150 have seen their PPEP increase nearly 60% during the same period, but with fewer peaks and valleys of the top 50. Overall, the collective AmLaw 200 has seen PPEP rise nearly 72% since 2003.
So, to recap the past 10 years of AmLaw 200 data:
- Total Revenue: up 84%
- Net Operating Income: up 98%
- $1 Billion + per year firms: up 900%
- Law Firm Size: up 29%
- Equity Partners: up 13%
- Revenue Per Lawyer Average: up 40%
- Profits Per Equity Partner Average: up 72%
By contrast, the Fortune 500 have seen their revenue rise 72% over the past decade, while their total profits, skewed by several years of declining profits in the years preceding FY 2002, rose slightly less than 1100% over the past 10 years. While the AmLaw 200 has been very successful in generating profits for their shareholders over the past decade, the Fortune 500 has been without peer.
The Most Impactful Trend?
The most telling trend, however, is the revenue share between the top 50 and bottom 150. Since 2003, when the AmLaw top 50 firms garnered 52% of the total AmLaw 200 collective revenue, the AmLaw top 50 has increased their share of total revenue to nearly 59% in 2013. While on the surface this may not seem like a huge over the past decade, what has happened is that the market share gap between the AmLaw top 25% (AmLaw top 50) and bottom 75% (bottom 150) has quadrupled, moving from a 4% gap in 2003 to 16% in 2013.
More than likely, this trend will not be ending anytime soon. Over the past decade, the average firm size has increased at twice the pace for the AmLaw top 50 firms (40% to 19.6%) compared to the bottom 150. Mergers and high-value lateral moves will continue bringing immediate revenue into the AmLaw top 50 firms.
The bottom line is that a majority of the firms (the AmLaw bottom 150) are getting a decreasing share of an increasing market, and have been for the last 10 years. Can many of the AmLaw bottom 150 continue to survive? In a traditional business environment, the answer is no. In the business of law, the answer is not so simple. There will be some firm attrition, but the reality is that even the bottom 150 have seen tremendous revenue and profitability gains over the last decade. Furthermore, as discussed earlier regarding the App Economy, there will be "new business" revenue opportunities that will continue to develop. With the amount of profitability generated by the Fortune 500 in recent years, spending on R & D and M & A should continue, increasing revenue opportunity for outside counsel.
In a complex market where the majority of firms are competing for a piece of the steadily decreasing overall share of the rapidly increasing revenue, firms must generate unique differentiation to create their competitive advantage. The question many firms must now answer is who (or what) are they attempting to create differentiation from? For example, I'm one of many people who feel the greatest threat to the company atop of the Fortune 500, Wal-Mart, is Amazon. It is a "concessionary" business model that many consumers are embracing - In exchange for waiting two days for a product to be delivered, consumers are realizing a much lower overall purchase price. The business of law is experiencing this trend, as well. Both Rocket Lawyer and Legal Zoom have seen tremendous growth in their revenue. In 2012, Rocket Lawyer attracted more than one million paying customers, generating $28 million in revenue and capping a whopping three-year growth rate of 775 %. According to FastCompany.com, Legal Zoom's revenue is north of $200 Million, which would place Legal Zoom at number 139 (at minimum) on this year's AmLaw 200. Axiom Law is generating revenue in excess of $130 Million (2011 data), has an impressive list of clients, and even with 550 attorneys, is likely generating substantial margins. Axiom just landed another round of outside capital, and recently just handled all aspects (not just the due diligence) of a transaction for a large client. Finally, keep an eye on Clearspire as well, which boasts former ACC President Fred Krebs as an advisor.
Looking into the crystal ball, and armed with the last 10 years of KPI trends, what are your predictions for the business of law over the next decade?