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.
Collective AmLaw 200 Revenue and Net Operating Income
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.
Firms earning in excess of $1 & $2 Billion per year.
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.
Total average headcount growth
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%.
The average number of equity partners per firm
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%.
Revenue Per Lawyer
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.
Profits Per Equity Partner
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.
Revenue Share By Segment, AmLaw top 50, bottom 150.
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?