According to a recent Law.com article, midsize law firms that reported on their 2022 financial performance to the outlet have seen higher increases in revenue and net income than their larger Am Law 100 counterparts. Although larger firms added more headcount, midsize law firms also increased the number of lawyers they employ, including partners.
When considered on a per-lawyer basis, midsize firms still showed better results than the Am Law 100. Both categories saw a small drop in revenue per lawyer, with the decline at midsize firms slightly smaller. In addition, profits per equity partner increased in 2022, while that metric dropped among the Am Law 100.
Several industry analysts were consulted for the article, including Nathan Cemenska, Wolters Kluwer ELM Solutions’ Director of Legal Operations and Industry Insights. The legal market is complex, driven by both internal considerations within legal teams and external forces in the economy. The result is a landscape that makes it difficult to say whether one tier of firms is universally better off than another.
“Flight to quality”
The pandemic’s significant impact on companies across industries naturally affected their corporate legal departments (CLDs) and, in turn, the outside counsel firms they employed. Many chose to send more work to the larger firms, particularly with M&A activity up. This led to increased business for Biglaw firms, which are now seeing a downturn amid the uncertainty of the 2023 economy. That boom-and-bust cycle has not hit midsize firms in the same way.
According to Nathan, “During the pandemic, yes, there was a ‘flight to quality’ or prestige, with many deals getting done by the largest firms. The lower-ranked firms didn’t have the high highs, so they haven’t had to come down off those highs. But outside of the pandemic I haven’t seen evidence either way that mid-market firms are any more or less stable than their larger competitors.”
An advantage for larger firms
When in-house teams consider which firm to engage on a given matter, the decision can be a complex one. Some of the more technologically mature companies take a data-driven approach, leveraging legal ops tools to look at past performance on similar matters and even apply AI algorithms to improve decision-making.
However, it is still common for some legal professionals to prioritize personal relationships with firms to make selections. In these cases, Biglaw firms may have a significant advantage. As Nathan notes in the article, “A lot of CLDs are staffed with in-house attorneys who are alumni hailing from some of the industry’s largest firms. Those alumni know, like, and trust those firms and, on average, prefer to use them over a firm they don’t know. This increases demand for those firms. If in-house attorneys were from smaller firms, that would probably decrease demand for the largest firms.”
To read about how corporate law departments have been affected by recent law firm strategies on setting hourly rates, download our report LegalVIEW Insights volume 2023-1: Law firm rate increases, in which Nathan Cemenska analyzes the impact of rate increases by Am Law tier, industry, and other categories.