Legal Revenue Grows as Elite Law Firms Set the Pace 

Tech sector, M&A fees help to make 2014 law industry’s best year since recession

Last year, on average, was the best year for law firms since the recession. But averages can be misleading.

Revenue at large, corporate law firms rose by close to 5% in 2014. But that’s mostly because a small group of elite law firms continue to thrive, while more than 100 others struggle to keep pace.

A field of around 15 to 20 law firms dominates the law market, industry observers say. Most are corporate heavyweights that benefited from the boom in mergers-and-acquisitions work last year, including Davis Polk & Wardwell LLP, Kirkland & Ellis LLP, Skadden, Arps, Slate, Meagher & Flom LLP and Sullivan & Cromwell LLP.

At the 15 most-profitable firms, revenue increased 6.6% on average, according to data collected by Citi Private Bank’s Law Firm Group. That compares with a 4% increase across 170 other law firms surveyed by Citi.

“I think this gap is becoming insurmountable,” said legal consultant Bruce MacEwen. “If you’re a general practice, national-destination-for-nothing-in-particular law firm,” he said, it’s easy to “fall behind.”

That said, Citi’s aggregate numbers mostly show a stronger year for law firms. The bank found net income up an average of 6.1%, and profits per equity partner—a key performance measure in the industry—up 5.7%.

Unlike the past few years, when revenue increases could largely be pegged to inflation and higher rates, more work actually came in the door at many firms in 2014, according to Citi. Announced deals last year, valued at $3.45 trillion, according to Dealogic, delivered seven-figure fees for legal advisers and fueled work for ancillary practices such as antitrust and capital markets.

Some of the most-profitable firms included Paul, Weiss, Rifkind, Wharton & Garrison LLP and Sullivan & Cromwell, with $3.85 million and $3.68 million in profits-per-equity-partner, respectively, according to early results published in legal publication the American Lawyer.

Law firms close to the technology sector also have fared well. Two firms that focus on technology and life-sciences work, Cooley LLP and Fenwick & West LLP, reported 19% revenue increases, to $802 million and $327 million, respectively, according to American Lawyer. Fenwick advised on more than 170 M&A deals, Chairman Richard Dickson said, including representing WhatsApp Inc. in its $19 billion acquisition by Facebook Inc.Cooley’s growth came in part from the addition in late 2013 of more than 50 lawyers from now-defunct regulatory firm Dow Lohnes.

For law firms not in the upper echelon or knee deep in technology work, industry players say it’s time to assess how to stand out in a buyer’s market.

Some have tried to adapt by merging with rivals. Bingham McCutchen LLP and Patton Boggs LLP, two firms that recorded steep revenue drops in 2013, looked to competitors as saviors last year. In November, Bingham effectively dissolved when more than 500 of its lawyers joined Morgan, Lewis & Bockius LLP, and last summer, Washington lobbying shop Patton Boggs merged with Squire Sanders LLP to become Squire Patton Boggs.

“For us, the merger was an opportunity to stay ahead of our competitors,” said Squire Patton Boggs Chairman and global Chief Executive Mark Ruehlmann, citing the addition of global compliance and investigatory, public policy and Middle East practices.

Others are refocusing around certain practice groups or geographic territories, touting the adage that they don’t need to be all things to all people.

Washington-based Wiley Rein LLP, for instance, shed its bankruptcy group last year. In March it also laid off 18 partners and senior lawyers, because of the need to maintain “our strategic and practice area goals.”

“Half the battle is figuring out what [firms] really have to offer here other than a slick logo and slick marketing campaign,” said Dan DiPietro, chairman of Citi’s law firm group.

Before the 2008 financial crisis, it was easier for firms across the industry to make a decent profit. “We were all running this ATM machine called big law firms,” said Cooley CEO Joe Conroy. “The notion of just being great, that’s the part that’s getting harder. …You’ve got to have something else.”

Part of the problem: While times are good for those with strong M&A and other transactional practices, litigation, the other traditional big revenue driver at law firms, has slowed.

And things could get worse on that front. Many in the industry expect litigation and investigations stemming from the financial crisis to dry up in the next year.

Given the uncertain climate, most firms aren’t intent on growing. Citi recorded an increase in equity partners of just 0.3% last year, and of 1% in total lawyers.

“Overall there are still too many lawyers chasing too little work,” says Mr. DiPietro, with a caveat: “But it’s not as bad as prior years.”

Source: WSJ – Legal Revenue Grows as Elite Law Firms Set the Pace

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