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No Surprise: Profits Per Partner Decline for 2008

At this time last year we observed that 2007 was a banner year for partner profits, but asked whether the feast was a prelude to a famine. It turns out that the answer is yes. According to the results of  The American Lawyer's 23rd annual Am Law 100 report, as summarized by Editor-in-Chief Aric Press and Am Law Data Analyst John O'Connor:

for the first time since 1991, both average profits per partner and revenue per lawyer dipped last year among the Am Law 100 firms, the top-grossing firms in the nation. And, given the weakness in the market thus far in 2009, another decline seems likely this year.

The news for 2008 wasn't entirely bleak, with overall gross revenue growing by 4.1 percent, to $67 billion, a new record. But because of growth in head count and a drop in demand, particularly in the corporate and finance sectors, profits per partner (PPP) fell by 4.3 percent, to an average of $1.26 million, and revenue per lawyer (RPL) dropped 1.2 percent, to $818,000. Moreover, firms haven't hit rock bottom yet -- indeed, at the end of 2008, The Am Law 100 was essentially still a bit ahead of where it was in fiscal year 2006, which, was also considered a record year. Trouble is, growth is a matter of perspective and lawyers accustomed to seeing steady growth for 17 years simply can't recall a time when business didn't do anything other than increase.

So what accounts for the downturn? The first explanation is fairly obvious: Demand for legal services has dropped largely due to an economic downturn. But there's a second factor: Not only did demand drop but firms failed to adjust their hiring policies, resulting in a surge in head count which couldn't be sustained without partner profits taking a hit. In addition, firms made more non-equity partners (NEP) last year than equity partners and many NEPs received raises while full owners took a hit on profits. At Adam Smith, Esq., Bruce MacEwen has long contended that non-equity partners are costlier than equity partners or associates. Will this year's Am Law 100 results lead to reconsideration of the role of non-equity partners?

Press and O'Connor aren't willing to declare the death of BigLaw. But at the same time, they don't see 2008 as a single aberration.

What's your prediction? Will profits at large firms continue to slide and what can firms do to get back on track?

For more discussion, see WSJ Law Blog coverage.

Posted by Carolyn Elefant on April 29, 2009 at 01:13 PM | Permalink | Comments (2)


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