Being creatures that love evidence and precedent, lawyers often look at examples of successful firms when determining what strategies have the best potential return on investment.
In an effort to help uncover what those strategies are and how they are paying off, the Thomson Reuters Legal Executive Institute introduced our “Dynamic Law Firms” study in late 2017. Since that time, we’ve followed our initial sample of the most successful firms, dubbed “Dynamic” firms, to see how time has treated their strategic objectives.
The final year examined in our original study was 2016. On balance, 2017 was a far different year for many law firms. A new presidential administration, uncertainty over Brexit, legislative and regulatory changes, and a host of other shifting forces seemed to drive client business back toward Am Law 100 firms, pulling down important performance indicators for many Am Law Second Hundred and Midsize law firms. We wondered what impact that shift would have on the top-performing firms.
To that end, we decided a new version of the study was in order. We followed the same methodology as the original study: an analysis of the three-year (2015-2017) compound annual growth rates experienced by law firms within the Thomson Reuters Peer Monitor sample based on overall profits, revenue per lawyer and average profit margin. The quartile of firms with the best performance across these three metrics became our Dynamic firms. Those firms that struggled in these key areas and fell into the bottom quartile became our Static firms.
So how did they stack up?
Our new examination found that bigger may have meant better in 2017. The original study (covering 2014-2016) found no statistically significant difference in the lawyer count of Dynamic and Static firms. The new version of the study, however, found that Dynamic firms averaged about 175 more lawyers than did the Static firms, an average of 434 lawyers compared to 259. This is driven by the greater preponderance of Am Law 100 firms among the Dynamic population than among those firms in the bottom quartile. Where there were 14 Am Law 100 firms in the top quartile, there were only five among the bottom.
In another departure from the previous version of the study, leverage played a larger role in the results of this latest iteration. In the original study, Static firms exercised greater leverage on average. However, the most recent version of the study shows Dynamic firms averaging about four-tenths of a point (0.40) higher leverage, both in terms of demand and full-time equivalent (FTE) leverage. This is likely due to a higher number of large firms among the Dynamic population and a higher number of Midsize firms (which typically have lower leverage) among the Static.
Billable time type: non-contingent matters
While Dynamic firms enjoyed higher average billing rates, Static firms did a better job protecting their rates from discounts, write-offs and write-downs. Dynamic firms enjoyed an average standard rate advantage of $65 per hour; however, that advantage declined to only $54 per hour by the time money actually was collected. While still a clear advantage, this indicates that Dynamic firms experienced greater erosion in terms of rate collectability.
This rate erosion cannot necessarily be attributed to greater pushback by clients, either. The deviation from billing realization to collected realization – or the percentage of standard rates billed to clients compared to the percentage of standard rate collected – remained fairly consistent throughout the time period of the study. This indicates that clients didn’t necessarily push back any harder as time went on. The majority of erosion actually occurred prior to the bill being issued. This indicates that the erosion was due to either higher discounts being offered to arrive at an agreeable worked rate, or at the point that partners were managing write-downs prior to issuing a bill.
All timekeepers. Billable time type; non-contingent matters
These findings represent only the tip of the iceberg of what was uncovered in our latest “Dynamic Law Firms” study. For a full discussion of the results of this study, please download a copy of the final report.