Redwood Analytics

Some of the most recent headlines in the legal press have been aimed at the recession's impact on large law firms, and would leave one to believe that the industry is in shambles.  Indeed, the world's formerly largest law firm, Clifford Chance, saw its profitability decline by a whopping 37%, while a Top 20 U.S. firm, Morgan Lewis, has just announced that it was cancelling altogether its 2010 summer internship program, after deferring start dates for 2009 hires to October of 2010.  Much of the current commentary is focused on whether Morgan Lewis's decision is the first of many, and what that will mean for the industry generally, and current law students (and law schools) specifically.

We assume that Morgan Lewis acted appropriately in making its decision, as clearly there is less work than there was, and much uncertainty about when that work will return.  However, we don't believe that things on the whole are quite as dire as the articles focused on "mega firms" would have one believe.  While many large firms are still undergoing a significant, painful, deleveraging process, in general there is lots of opportunity out there, and pretty decent performance, across the legal industry.

Looking at numbers from the end of the first quarter from Redwood Analytics' benchmarking program, the following highlights provide us a less gloomy outlook than headlines would have us believe:

• While work hours per lawyer are down, work value per lawyer is up
• Both agreed and bill rates for associates and partners are up
• Structural leverage is slightly lower, but partners are working slightly fewer hours in relation to associates.
• Times to bill and time to collect have remained fairly steady
• Billing realizations have stayed constant

Not all news is good: the first statement, that total work is down, is more important than everything else.  However it's not down dramatically: only 4% for partners and 2% for associates.  These declines are far less severe than in other parts of the economy, especially when one considers the profit margins that law firms enjoy.  Additionally, the realizations on old Accounts Receivable have declined, meaning the risks associated with older inventories are higher.  However, taken in the context of the broader economy, and especially when one considers the weekly barrage of bad news reported in the legal press, it's important to maintain a little perspective.  Being a partner in mid-size or large law firm is still a very desirable place to be, and affords much greater stability than most parts of the economy.  More importantly (surprisingly?), law firms appear to have managed themselves quite well through the recessions.  They have deleveraged themselves, but in most cases not dramatically; they have not allowed partners to hoard work from associates; they have maintained their billing and collection practices (in the face of much resistance from clients); and they have managed to raise rates and pass those rate increases on to their clients.  Additionally, they are preparing for whatever shift eventually does happen away from the billable hour (I remain dubious about how significant this will be) by thinking about matter budgeting and profitability much more before.

I do believe that the worst is behind us, and while it's not clear to anyone how long it will take for things to return to the levels of 2006 or 2007, it's also true that, for most full-service firms, things were never as bad as the stories in the press would have one believe.