Law Firm Rates Circa 2023
Note: The views here are my own and most decidedly do not reflect the view of my employer or its Rate Review Committee.
The graphic displays profits per equity partner profits against inflation since 1985 (the year The American Lawyer published their law firm rankings for the first time).
This extends the timeline on a chart my dad originally published (p. 22) in his book Declining Prospects: How Extraordinary Competition and Compensation are Changing America’s Major Law Firms* (Michael H. Trotter, 2012).
The wonky shift from the AmLaw 50 to 100 mid-chart is because despite a subscription to The American Lawyer I was unable to augment the data available from free public sources to get a full timeline for one or the other. However, the point can still be made: By 2010 law firm profits had more than doubled over inflation. In the period 2015-2023, law firm profits have exceeded inflation by 240% on average.
As I've talked about before, my dad was among the first to teach the business of law (Emory Law School mid-1990s). He also served as an expert witness/consultant in trials around the dissolutions of Howrey (2011) and Dewey LeBouef (2012).
Against the backdrop of having heard him to discuss his work at length, following our Rate Review Committee deliberations in 2023, I have been reading communications along the following lines from firms that easily fall into a top 100 ranking:
“while the firm appreciates your proposal, which averages to an approximate 7.7% increase, the increase is not sufficient to cover the rising operational costs over the last 2 years coupled with our timekeeper rates remaining without an economic or matriculation increase.” [Author Note: Core compound CPI in the past 2 years for the US is 5.6%]
To my thinking there are only two options here:
- The email is not factual, as firm profits in this demographic have averaged 35-45% for almost 40 years**, or
- The email author is in the engine room on the Titanic (e.g. the next Howrey or Dewey).
With respect to option 2, I am thinking (a) this is highly unlikely given what I know about the firms and (b) perhaps this is not the message equity partners intend for their teams to be communicating to clients.
With respect to option 1, weigh the AmLaw 100’s 40 years of profits in the 35-45% range against S&P 500 returns 1985 to present of 5.7% per year on average, or the Global Fortune 500 7% profits on average in 2023, while the top 10 garnered 24%. The legal industry has set a record most any other industry on the planet, except perhaps energy, would envy.
While I came into this profession with a strong footing in law firm economics and optimistic for the immanent transformation of the legal industry, fifteen years in I can’t help but think that the dynamic sets interests at odds that are irreconcilable. Some firms may -
- dissemble to clients about its own financial situation, while profering itself as a “trusted” advisor.
- offer services sold as helping their clients’ business while extracting payments at a pace that exceeds their client’s profits.
Perhaps I wasn’t listening closely enough when I read in business school Barbarians at The Gate: The fall of RJR Nabisco (Bryan Burrough and John Heylar). As I write this, there has been much to do about Kirkland & Ellis rising to #1 in the AmLaw 100 with $7b in revenue in part due to racking up $165m over 3 years from a single private equity firm client, Blackstone. Not coincidentally, the private equity business also happens to have a model virtually identical to traditional law firms, insensitive to costs because they pass through every cost they can to their clients. Thinking of that time our legal subscription provider knocked down a rate by 90% with the comment “we can charge that to law firms, because they just charge it back to their clients as an expense.” Me: “You do realize that I represent the client the firm is trying to charge that price back to right?"
In yesterday’s Law.com Paul Hopkinson published an article “The Global Lawyer: How to Grow Fast Like Kirkland” His answer, “Any firms hoping to replicate that kind of success would do well to find their own highly lucrative market that is set for a strong period of growth over the coming years.” He might have added, and if your client does not fall in that bucket, try not to be tone-deaf to their situation.
None of this is to dispute the for-profit legal industry's right to make a good profit. I support making a good living. After all, law firm profits paid my way through ivy league college, braces, and many pleasant island summers. That said, I think the assumption that law firm clients in industries with lower profit margins should subsidize much greater profit margins than their businesses can generate is at best unrealistic, and in some cases downright predatory (but that’s a story for another day).
Hence the rise of the corporate law department to an extent where in-house in many cases competes directly with external firms for their clients work and almost always accomplish with greater knowledge of their clients’ business and at more modest cost. However, 15 years in, I’m thinking the hybrid model corporate law departments have adopted of in and out sourcing to law firms is feeling tremendous strain. There is absolutely room for law companies, and new model law firms to forge a path that can achieve profits on par with clients and relieve this strain. To Kirkland & Ellis (and with all due deference to the Don Corleone character), “ I know you'll do very well, and good luck to you, especially since your interests don't intersect with those of my employer.”
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*Speaking of personal views, I argued vociferously against this discouraging title for this book, which contains great data.
** With respect to law firm profit margins remaining in the 35-45% range since 1986, I commend to your attention to an excellent article by Madhav Srinivasan, Hunton Andrews Kurth LLP (March 28, 2023): https://www.law.upenn.edu/live/news/15692-are-profit-margin-and-recessions-still-in-sync.