Editor: Draco Copper | Tactical Investor
Top Firms Get Richer In Otherwise Poor Year For The Legal Industry
On the other hand, like a lot of 2016, the year is best measured by your point of view. If you’re a fan of anyone from Bowie to Gene Wilder to Princess Leia or a typical member of the Am Law 200, you didn’t have a great year. That said, if you’re a white supremacist, a Patriots fan, or one of the elite law firms perched atop the Am Law 50, 2016 wasn’t all that bad.
The Citi Private Bank 2016 report — an annual survey of 193 firms (77 Am Law 100 firms, 53 Second Hundred firms, and 63 niche/boutique firms) — shows a relatively bland year in the legal industry, with a noticeable break between the performance of top firms and the rest of the pack. Not that we weren’t expecting this based on the quarterly reports Citi put out throughout 2016, but it’s more evidence of a trend we’ve seen for the last several years.
As a further indicator of industry dispersion, we saw that the 15 most profitable firms who report to us outperformed the industry, with PPEP up 6.6 percent and net income up 6.9 percent. As most of these firms are in the Am Law 50, we noted that they drove the strong performance of that segment, by increasing both demand and rates, and collecting faster than in 2015.
The Am Law 50 outperformed other segments in profit growth, and was the only segment to beat its 2015 performance. Am Law 51-100 and Second Hundred firms saw expense growth outpace revenue growth, as both segments saw modest rate increases and a slowing of collections, and in the case of the Am Law 51-100 firms, a 1.2 percent drop in demand. Going into 2017, niche firms were the only segment to see stronger year-end inventory growth compared to 2015, and only just (up 3.7 percent, compared to 3.6 percent).
Expense growth of 3.4 percent was consistent with 2015, and might surprise many, in light of the midyear associate salary increases. The key here was careful management of operating expenses. Compared to the 3 percent growth in operating expenses seen in 2015, the industry managed to control growth in 2016, reporting just a 1.9 percent increase. On the other hand, compensation expenses grew 5.4 percent, much higher than the 3.8 percent increase reported in 2015.
While lawyer head count growth contributed to this, we also believe the increase in associate salaries was a key driver. The full effect of these increases is yet to be reflected in the results, as we’ve heard anecdotally that while many firms implemented these increases in mid-2016, others delayed implementing them to the fourth quarter of 2016 or the start of 2017.Full Story
New York Biglaw Makes Waaaay More Money Than The Rest Of You
Profits per equity partner, for example, shot up by 18 per cent at Cravath, Swaine & Moore; 13.5 percent at Davis Polk & Wardwell; 14 percent at Fried, Frank, Harris, Shriver & Jacobson; 12.8 percent at Milbank, Tweed, Hadley & McCloy; 18 percent at Shearman & Sterling; and 22.6 percent at Weil, Gotshal & Manges.
“It was our best year ever,” said Davis Polk managing partner Thomas Reid, adding that the firm saw “above-normal strength in restructuring, leveraged finance and M&A.”
Also reporting strong partner profits were Paul, Weiss, Rifkind, Wharton & Garrison, up 7.2 percent; Cahill Gordon & Reindel, up 8.2 percent; Cleary Gottlieb Steen & Hamilton, up 7.8 percent; and Kramer Levin Naftalis & Frankel, up 8.5 percent.
Some top-line growth for top New York firms was driven by increased regulatory and investigations, private equity, mid-market M&A, bankruptcy and restructuring work, [Citi Private Bank Law Firm Group head of advisory services Gretta] Rusanow said. But there was no uptick in demand. In fact, lawyer demand, as measured by total logged billable hours, was up for New York-based firms by an average of just 0.1 percent, compared with 0.3 percent growth for the industry, Rusanow said.
Instead, revenue growth was driven by stronger rate increases—up to 3.7 percent among New York firms compared with 3.3 in the industry—and less discounting pressure, Rusanow said. “They were able to retain higher rate increases,” she said. Full Story
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