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The Law Firm Disrupted
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Roy Strom
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In this week's Law Firm Disrupted, we look at just how much the Am Law 50 has pulled away from the pack in the past five years.
I'm Roy Strom. Let me know how to make this weekly briefing on the changing law firm market pull away from the pack here, or sign up to receive this newsletter here.
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There Is More than One ‘Big Law’
Last week, I wrote about a report on the state of the legal market that declared, “We do not have one market for legal services anymore.”
That quote came from James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, who authored the joint Georgetown and Thompson Reuters report.
There is more than one market for legal services. It seems like such an obvious thing. And yet, it’s not.
That may be because the top 100 firms have been neatly categorized as “The Am Law 100” for so long. It may also be because law firms of a certain size all operate under the same broad business model. And, as Jones went on to say, they all more or less believe they are offering the highest end of legal services.
This is, of course, not the case. And he says it leads to bad business decisions on the part of less-wealthy law firms. Case in point: Am Law Second Hundred firms trying to pay their lawyers the same as Cravath.
At least three distinct legal services markets have emerged over the past five years, and each is facing a different reality, ranging from impressive growth to stagnation to a general decline. Those states of affairs describe, respectively, The Am Law 1-50, The Am Law 51 to 100 and the Am Law Second Hundred.
Consider this: Since 2012, the total net income of the top 50 Am Law firms has grown at a pace twice that of the second 50 firms: 35 percent to 17 percent. And in the same period, net income of the Second Hundred has declined by 1 percent. (That data comes from my colleagues at ALM Intelligence.)
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Another way to see how the balance of power inside the Am Law 200 has shifted: Today, the top 50 firms account for 65 percent of the total compensation paid to equity partners, while the Second Hundred accounts for 15 percent. In 2006, partners at the 50 largest firms took home 57 percent of the total profits while the Second Hundred’s partners took home 21 percent.
What you might call the “Middling 50,” firms from 51 to 100, today account for 20 percent of the Am Law 200’s net income, compared to 23 percent in 2006.
A similar yet not as dramatic relationship exists when looking at how the share of revenue has shifted among the Am Law 200 over the past 10 years.
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So, there really is no doubt. The market for “Big Law” legal services is vastly different for the big, bigger and biggest law firms.
Still, Jones’ statement that mid-tier firms are making bad decisions by following business tactics pursued by the richest firms begs the question: What are the effects of those decisions?
In other words, is the divergence in fortunes shown in these charts caused by those decisions by Second Hundred firms? Is it exacerbated by them? Perhaps more to the point, what strategies should Second Hundred firms take to correct this worrying trend? Is there anything they can do?
I don’t know the answers to those questions. I’d be eager to hear your thoughts. And in the meantime, I will leave you with another Jones’ quote, which I think bears repeating:
“A lot of people have a really hard time being honest about where their services fall because the vast majority of American law firm services are in that big middle. And I’ve never met a lawyer who didn’t like to think that he or she performed brain surgery. But you know, there just aren’t that many big brain operations going on that clients are paying for.”
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Roy’s Reading Corner
On Overbilling: Every couple of years, it seems, a Big Law overbilling case comes across the wires. Today, the scandal impacted Kirkland & Ellis and a Chicago mid-size firm, Neal Gerber & Eisenberg. But this was not your usual overbilling case. It was, in some ways, scarier.
That’s because Neal Gerber & Eisenberg says that even if the firm’s billings had been subject to an audit, the overbilling that Christopher Anderson confessed to would have gone unnoticed.
From the story: Scott Fisher, the firm’s managing partner, said an investigation the firm commenced following Anderson’s confession found there was no “data indicating any unreasonable bill, any discernible pattern of time inflation nor any material overcharging.”
“The investigation further found that, had our firm been subjected to an outside audit of its billing records, Mr. Anderson’s time would not have drawn attention,” Fisher said in an email.
Regardless, the firm says it agreed to refund clients a total of about $150,000, which equates to 20 percent of Anderson’s billings. So, if I’m taking this all down correctly, Big Law firms could get away with charging their clients 20 percent too much and nobody would notice – even if they were looking.
Nobody Ever Got Fired For Hiring Skadden: Except (maybe) Paul Manafort. And Skadden paid $4.6 million as a result of an agreement reached on Thursday with the Department of Justice.
From the story: According to the agreement, Skadden acted as an agent of the Ukrainian government in violation of the Foreign Agents Registration Act by contributing to a public relations campaign directed at select members of the U.S. news media in 2012, the Justice Department said in a press release Thursday.
Skadden received several inquiries from DOJ’s FARA Registration Unit about its role in that campaign, DOJ said. An unnamed partner lied to the unit, which led it to conclude in 2013 that the firm was not obligated to register under FARA. The facts later showed that Skadden was indeed required to register in 2012.
It’s Earnings Season: And not just on Wall Street, where last year brought in a record haul of profits—like most expect to be the case for Am Law partners. It’s also Am Law earnings season!
The first early report on firm financials comes from my colleague Xiumei Dong, who writes that Fenwick & West had a record financial year in 2018.
As a reporter who works on unearthing these figures every year, I’d like to invite you—the ultimate insiders—to please share any tips or suggestions you might have as to how particular law firms performed last year. You know where to find me.
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That’s it for this week! Thanks again for reading, and please feel free to reach out to me at rstrom@alm.com. Sign up here to receive The Law Firm Disrupted as a weekly email.
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