This week I read an excellent analysis of BigLaw financial performance. I share it here and add a few comments.  

My friend Steve Nelson of The McCormick Group, an executive search firm with a big legal practice, is an astute observer of the legal market. He was previously a practicing lawyer and editor of the Legal Times. With his permission, I reproduce here an e-mail report that he sent on 22 April 2010 titled “TMG’s Take…on 2009’s Financial Results”:

“Individual reports on law firm performance for 2009—which many observers regard as a watershed year for the legal industry—continue to trickle in. A perusal of those reports reveals some interesting trends:

1. It’s clear that law firms did a pretty good job of controlling costs during 2009. While total revenues declined for most firms (60 percent in our sample of 85 firms), the profit picture was decidedly different, as 58.5 percent of the firms reported an increase in profit per partner during 2009, and another 6.1 percent came out even. Those results contrast to 2008, where the sudden collapse of the economy caught many by surprise. That year, more than 70 percent of the firms reported increases in revenue, but just over 40 percent saw profits increase.

2. Law firms performed well in comparison to their largest clients in 2009. Overall, the law firms in our sample reported a 2.5 percent decrease in revenues, compared to a 7.3 percent decrease in revenues among the Fortune 100. The difference in profits was much more dramatic, with the law firms reporting a 2 percent increase, as opposed to a 56.2 decrease in profits among the Fortune 100 (This, of course, is a double-edged sword for law firms, as corporate clients may use these statistics to further hammer the firms on rates and value). [emphasis added]

3. Contrary to what was predicted by many observers a year ago, the elite Wall Street firms did pretty well in 2009. Cravath, Cahill Gordon, Sullivan & Cromwell and Simpson Thacher all reported increases in both revenue and profits in 2009, while Cleary Gottlieb came out even in both categories. Beyond that, there were few discernible trends based on size or geography, although firms with less than $300 million in revenues tended to do somewhat better than their larger counterparts.

4. Despite the two rough years, 14 firms were able to report increases in both 2008 and 2009. While some of those were among the larger firms in the country (such as Weil Gotshal, Bingham McCutchen and K&L Gates), there were many smaller firms included in the list, including two that are essentially one-city firms (Wiley Rein and Irell & Manella). So there was no pat formula for success over the past two years. On the other hand, only seven firms reported two consecutive down years in both revenues and profits.”

Steve has an Excel file with detailed results that he will share by request to snelson at tmg-dc dot com. Now my own comments….

I highlighted Steve’s point in #2 about the divergence between law firm and corporate profits. With purchasing professionals more and more involved in acquiring legal services, I agree with his observation that this could make future negotiations more difficult. In #4, Steve notes that there is no pat formula. I agree and venture a guess that these data show that law firms are differentiating. Using the detailed Excel file, I found the results intriguing:

Comparison of 2008 to 2009 Change in Revenue and Change in Profit (numbers of firms)

Profits Up 30 21
Profits Down 3 26

I’m not sure what to make of this quadrant analysis without looking specifically at each firm. I suspect the different outcomes, especially for those firms that suffered a revenue decline, reflect differing appetites for cost cutting. If so, it would be interesting to see if the firms that (more) willingly accepted a drop in profits prosper more in the long term because they retained talent, preserved their culture, or both.

I wish I could believe that some firms decided to use the downturn to invest in legal tech – deciding to let profits drop – while their peers were down, hoping to gain a competitive advantage when the upturn comes. Hope springs eternal but that seems unlikely. I’d love to be corrected!