The recently released Peer Monitor Index for the second quarter of 2019 highlighted a few encouraging and some discouraging signs that mimic half-year results.
Digging deeper into the data, we investigated the largest lawyer group — the Associate class — and how it is contributing to some of these signs, both good and bad, that have been seen in the law firm market.
Other than being proportionally larger, based on worked hours and full-time equivalents (FTEs), Associates lead the field in almost every growth metric tracked by Thomson Reuters Peer Monitor. The strong performance metrics — like demand, worked rates, and fees worked — are all being driven up by Associates. In Q2, Associate demand increased on average by 1.7%, a full percentage point higher than the 0.7% increase in overall average demand. For worked rates, associates increased 4.0%, compared to 3.8% for the market; and in fees worked, Associates were up 6.0%, with the market showing a strong, but slightly lower growth at 4.2%.
And then the bad news, Associates also lead the way in FTE and direct compensation per lawyer growth, which equates to the highest total direct expense of any lawyer type. To put that in perspective, the average firm experienced 4.1% direct expense growth for all lawyer types in Q2, while the average expense increase for associates was 6.9%.
In the Am Law 100, the impact is even more pronounced. In the chart above, Associates are above the market in every metric. The same can be said for the average Associate at the Am Law 100 law firm, but the results are even more distinct, especially when compared to the Am Law Second Hundred and Midsize law firms.
So, if Associates are yanking on both positive and negative performance metrics for the market and specifically for the Am Law 100, what might be the reasons for this trend? Starting salaries for Associates have experienced two large increases over the past two years, and these increases have often been discussed as a theory for why the increased worked rates we have been seeing this year.
I mean, these salary increases are clearly a major driver of direct expense growth this year, right? Well, there may be some more to this theory.
It has long been known that some of the most profitable law firms on the planet, also carry very high leverage ratios. In the chart below, you see that Associates absorb about 10% more work in the Am Law 100 than in the other two law firm segments.
What is most fascinating about the data isn’t just the drastic difference between segments, but the change in the proportion for the Am Law 100 from 2018 to 2019. With demand for the market being relatively slow at 0.3% through this past June, the large boost in demand growth for Associates isn’t all coming from new work, instead, it looks like law firms are strategically giving Associates more of the pie. You might think a 0.4% difference might not seem like a large shift for the Am Law 100, but that small percentage shift equates to 361,360 hours of work shifting to Associates based on 2018’s total hours.
Leverage, like in many professions, is a double-edged sword. As the base to the pyramid gets larger to allow for greater heights, the subtle changes need for a larger foundation can lead to huge swings at the top. Associates are taking on more of the work and bringing home more of the revenue than last year, and our data shows they are getting paid accordingly, if not more.
Is that sustainable at current levels? Time will tell.
For law firms and especially the Am Law 100, the ability to strike the right balance for their Associates might make or break their bottom line.