Big Law Should Use Profit Boom To Help Solve Retention Issues
Welcome to the Big Law Business Chronicle on the changing legal market written by me, Roy Strom. This week, we take a look at how law firms can use their increasingly lucrative stocks to retain talent. Register now to get this column delivered to your inbox most Thursday mornings.
It’s worth taking a step back to remember just how far the Big Law market came in a year ago.
In the nine months of 2020, Big Law had gone through a recession and many companies came out on the other side with more work than they expected. A Wells Fargo survey of some of the top 50 companies found revenue grew nearly 8% in nine months of 2020 compared to 2019.
It was a surprise. The managing partners breathed a sigh of relief.
What a picturesque time it was!
Now everyone is worried about not finding enough associates to do all the work and worries about paying higher wages than ever before.
Existential questions are asked about the relationship between partners and law firms. Will they continue to move? Will they ever come back to the office? Will there be an overabundance of lawyers when the tide of transactional work recedes?
Focus too much on these questions and people might forget something important: It’s never been more time to be a Big Law partner.
The overwhelming success of 2021 can go a long way in addressing the retention issues facing today’s market.
On Tuesday, Wells Fargo said its survey showed the top 50 companies experienced 17% revenue growth from the period last year. If this holds for the entire year, the top 50 companies will be within reach of a $ 100 billion market. Last year, the top 50 companies grossed just over $ 82 billion, according to data from AmLaw.
The value of a Top 50 partnership is set to increase even more.
Wells Fargo said the net income of the top 50 companies increased 27% over nine months this year. Apply this over a full year and the group’s profit pool could increase by $ 10 billion. In 2020, the top 50 companies had net income of nearly $ 37 billion, spread among a group of about 13,650 financial partners, according to data from AmLaw.
There is one obvious way to get lawyers to stick around: to 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 partners has long been a popular way for law firms to assess their earnings per shareholder. Without even commenting on the implications for association morale resulting from this trend, this is not a good business strategy in today’s market.
Last year, 18 of the top 50 companies downsized their capital partnerships, according to data from AmLaw. Of these companies, only two experienced a drop in their bottom line, which is arguably the best reason to reduce a company’s equity level.
On average, the profit pool of the 18 companies grew by 6%, but their profits per partner increased by more than 16%, due to the pie being distributed among fewer partners.
Law firms should avoid this strategy this year and opt for a more inclusive approach instead. They should extend their fairness levels to more lawyers who, after all, have earned it. They are working harder than ever.
The widening of the fairness level will be an indispensable sign for lawyers that staying will be rewarded.
Worth your time
On the financing of litigation: Valerie Bauman and I reported a deep dive into a litigation finance firm, Pravati Capital, which has a history of litigation with its own clients.
On Silicon Valley: Cleary was officially launched in Northern California, hiring an antitrust litigation partner from WilmerHale and moving a handful of existing partners to Palo Alto and San Francisco.
On internal moves: The Jacksonville Jaguars have a new general counsel, and PayPal Holdings Inc.’s general counsel is leaving at the end of the year with a notable message. “Neither of us is maximizing our potential if we continue in the same role forever,” Louise Pentland wrote in a LinkedIn post detailing her decision.
It’s all for this week ! Thanks for reading and please send me your thoughts, critiques and advice.