According to various reports, a recent survey from Wells Fargo’s Legal Specialty Group revealed some surprises. It’s been reported for the first six months of 2023, the legal headcount is up 3.9%, but billable hours are down. Significantly down. Wells Fargo surveyed over 130 law firms, including 68 AmLaw 100 firms. The Specialty Group frequently tracks and analyses law firm data and trends.
According to the Survey, lawyers in 2022 billed an average of 1,568 hours. This was 102 fewer hours than in 2021 and less than in 2020 and 2019. The reduction is about a 1.9% drop. But Wells Fargo also reports that in the largest 50 law firms, the decline was closer to 2.9%.
The result: not surprisingly, partners’ net income dropped 3.1% in 2022 after several years of growth. And more alarming, profit per partner fell 3.9%. This reduction is despite the fact overall revenue grew by over 4%. Obviously, many law firms were increasing their rates, some by as much as 7.7%, to make up the difference.
According to reports, the findings are consistent with a recent Thomson Reuters Study. That Study also reportedly found reduced demand and profits. It also noted expense increases.
The decline in billable hours could be due to several reasons, of course. One is that lawyers have become more efficient, using technology to get more done faster. Yeah, right. If you believe that, I have a bridge to sell to you.
Another option may be that firms and lawyers are catching their collective breath. Having just come off several years of back-breaking demand partly due to Covid, everyone has caught up and is taking a bit of a break. But lawyers don’t usually work that way.
Of course, the most obvious answer is that there is a decline in demand. Less legal work. Clients using technology and automation to do more in-house. A drop in demand means less profit and more dissatisfaction among partners in law firms with firm management. More risk of defections to other firms by partners with big books of business. In general, reduced billable hours means more disruption and angst all the way around.
In light of this possible decrease in demand, one final stat from the Survey is interesting. Associate layoffs and deferrals have been modest. While this may seem surprising, the speculation is that firms are taking a wait and see attitude. Too many firms were burned before by laying off too many associates too soon, only to see demand jump back up. When that happens, it’s a buyers’ market for associates who can demand anything from more money to more lifestyle balance to more remote work. None of these are attractive to firm management.
And when you lay off associates, often associate work flows uphill to overqualified partners. Bills go up, and firms risk client complaints.
A decline in billable hours but no reduction in cost at the associate level puts increased pressure on partners to perform.
But there is a danger in holding the line with associate capacity. A decline in billable hours but no reduction in cost at the associate level puts increased pressure on partners to perform. Firm management will be under pressure, particularly from more productive partners. More productive and assertive partners will demand management take a hard look at those partners who are not performing to expectations. Partners who may not be taking up the slack. When overall profit per partner decreases, productive partners say their shares shouldn’t be diluted by shares going to those who aren’t pulling their weight.
Reports of the Survey do not indicate whether the decline in hours was the same at both associate and partner levels. But with the decrease in profit, it may not matter. In most law firms, there are high performing and profitable partners and lesser performers. Those lesser performing partners can fly a little under the radar in times of plenty. After all, no one likes to go after one of your partners for not billing or being profitable enough. They are your partners and someone you know and perhaps have worked with. Maybe you even know their families. And there is always the “but for the grace of God, go I” syndrome. Who knows what the next year may look like for any partner.
Partner removal is often not an option firm management wants to tackle
There is also the issue about what to do with an underperforming partner. You can pay them less next year, sure. But that often doesn’t solve the problem. If it doesn’t, at some point, firm management has to consider expulsion. Since law firms’ decision making is usually based on consensus and removing a partner may require a partnership vote, removal is often not an option firm management wants to tackle. It’s disruptive and leads to hard feelings all the way around. It certainly doesn’t do much for “firm culture” upon which so many firms pride themselves.
So, firm management is between a rock and a hard place, especially when faced with decreased partner profits. It doesn’t want to start kicking lawyers out of the partnership. But it also doesn’t want to see more productive lawyers leave because their shares are diminished to support the unproductive partners. No matter what management does, underperforming partners can be a festering problem in times of scarcity. It’s a problem again made harder by the consensus model and the often long-term relationships between partners.
Of course, added to that is the fact that in times of declining partner profits, no one is happy with anyone, and the blame game can be intense. The longer the decline lasts, the worse it’s going to get.
Law firm management could be in for some rough sailing.