the survey of law firm economics

temperature
tHe oVeraLL mooD
We asked: Looking ahead to next year, with respect to your law firm, are you:

taKiNG tHe

This year, for the first time, we asked Survey of Law Firm Economics participants to tell us how they felt about the financial picture for 2011 and beyond. Would the economy recover? Would their firms thrive? How would profits, billing rates and revenues fare in 2011? What follows is a measure of the mood from 200 firms that answered this years survey.

aLL firms

By firm size

NumBer of Lawyers

optimistic

pessimistic

uNcertaiN

2-8 9-20

50% 82% 67% 85% 87% 94%

17% 6% 0% 2% 0% 0%

33% 12% 33% 13% 13% 6%

optimistic 78%

pessimistic 3%

uNcertaiN 19%

21-40 41-75 76-150 150+

Firms, this year, are a largely optimistic lot. Three-quarters of participants said they are optimistic about their firms future in the year ahead. That was especially true at the largest firms in our survey. Nine out of 10 firms in the 150-lawyer-and-larger category said they saw nothing but blue skies ahead. At the smaller end of the scale, however, a few thunderclouds have developed. Half of firms in the two- to eight-lawyer range said they were pessimistic or uncertain about the next year.

tHe ecoNomy
How do you expect the U.S. economy to perform in the next year?
Grow rapidly

profits per partNer

How do you expect profits per partner to perform in 2011?
They will grow by more than 5%

.5%

Decline slightly Grow slightly

71%

No growth

26%

3%

15%

They will grow by 5% or less

They will decrease They will be flat

8%

51%

26%

The economy may not be in a recession, firms said, but they didnt expect it to grow dramatically, either. Again, larger firms were slightly more optimistic in this category: 88% of 150-lawyer-plus firms saw the economy growing slightly compared to 67% at two- to eight-lawyer firms.

This years Survey of Law Firm Economics shows a big increase in profits per partner, but firms are hedging their bets for this fiscal years performance. Though 66% said PPP will be up, most said it will increase by less than 5%. Firms in the 21- to 40-lawyer range were the most pessimistic about profit performance, with 45% predicting a flat year or a decline.

BiLLiNG rates
What did you do with billing rates for 2011?

practice GrowtH
In which practice area do you expect to see the most revenue growth in 2011?
Increased them by less than 5%

aLL firms

12%
No. of Lawyers

Increased them by more than 5%

67%

Held them flat

22%

51%

Litigation

iNcreaseD rates By more tHaN 5%

iNcreaseD rates By Less tHaN 5%

HeLD rates fLat

By firm size

2-8 9-20 21-40 41-75 76-150 150+

6% 15% 4% 15% 9% 29%

24% 55% 71% 75% 81% 71%

71% 30% 25% 10% 9% 0%

Corporate

Its no contest: Litigation is back, and will lead revenue growth this year. Although the deal market has picked up somewhat, more than half of firms said they believed their work would keep them in the courtroom.

19%

19%
Bankruptcy/ restructuring

Other

The largest firms were the most aggressive about rate increases in 2011. All responding firms of more than 150 lawyers said theyd raised ratesand more than a quarter said they pushed rates up by more than 5%. Small firms didnt have that option. Among the smallest firmstwo to eight lawyers71% said they held rates flat and nearly a third of firms in the nine- to 20-lawyer range did the same.

7%

Intellectual property Real estate

2%

2%

the survey of law firm economics

fee assessiNG tHe aLterNatiVes arraNGemeNts:

The billable hour remains king for most of the firms participating in the Survey of Law Firm Economics. That said, 95% of firms reported that they had engaged in some kind of alternative fee arrangement during the past year. Heres what firms told us about the percentage of billings, the increasing use and types of arrangements:

perceNtaGe of BiLLiNGs
In 2010, what percentage of your firms billing was valued through an arrangement not based solely on hourly rates?

types of arraNGemeNts
In 2010, what percentage of your firms billing was valued through an arrangement not solely based upon hourly rates? (Percentages below represent the number of respondents who identified a particular type of fee arrangement.)

5.5% 5% 9%
Between 26% and 50%
Alternative fee arrangements represented a quarter or less of billings for 86% of firms. Just 29 of the 200 firms we surveyed reported that fee arrangements represented a quarter or more of billings. Many of those firms had fewer than 20 lawyers. In fact, in most cases, our survey showed that the smaller a firms size, the greater likelihood it would engage in alternative fee arrangements.

greater than 50%

none

defense contIngency fee 3% other 4% holdBack 6% flat fee wIth shared savIngs 6% Phased fee 9% PartIal contIngency or success fee 21% caPPed fee 35%

19%

Between 11% and 25%

61.5%

Between 1% and 10%

iNcreasiNG freQueNcy?
What change did you see in the volume of alternative fee billings from 2009 to 2010?

Blended rate 44%

contIngency fee 75%

Last year did not represent a wholesale move toward alternative fee arrangements. Just a bit more than a quarter of firms said they saw an increase in alternative billings. And firms in nearly every size category reported no change in the status quowith one major exception. Some 63% of largest firms surveyedthose with 150 lawyers or moresaw an increase in alternative fee billings last year.

28% 66% 6%
decrease no change

Increase

flat fee 83%

Two types of alternative fee arrangements dominate the landscape: Flat fees and contingent fees. It likely doesnt hurt that they are the simplest arrangements to explain to clients (and to fellow partners). Although smaller firms more frequently reported alternative fee arrangements, they experimented less: the vast majority of alternative billings were flat or contingent arrangements. Among the largest firms, capped and blended fees were nearly as common as flat or contingent arrangements. And those firms had more holdbacks and phased-fee arrangements.

the survey of law firm economics

partNers: a BiG pay raise

Equity partner compensation plunged in 2008 and made up just a little lost ground in 2009. This year, however, the pay picture was much brighter: Equity partner compensation rose by 7%. Among all partners, including equity and nonequity, pay levels jumped from $272,000 to $290,000the biggest increase in nearly a decade.
year eQuity partNers aLL partNers

2006 2007 2008 2009 2010

$365,000 $374,000 $353,000 $358,000 $383,000

$278,000 $279,000 $272,000 $272,000 $290,000

expeNses: oN tHe rise aGaiN

year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Expenses at firmsaveraged on a per-lawyer basisclimbed in 2010 to pre-recession levels after declining for two consecutive years. The expenses-per-lawyer figure fell 5% in 2009the largest decrease in the 25 years we have tracked this metric. But firms made up for lost time in 2010, when expenses rose 6.1%the sharpest increase in expenses since 1997.

expeNses per Lawyer

$144,568 $155,120 $152,562 $158,972 $155,952 $161,892 $167,366 $170,363 $167,256 $159,521 $169,288

wHere Does tHe moNey Go?

2% 2% 6%
occuPancy equIPment

PromotIonal

1%
other

reference

10% 17%
staffIng

62%

lawyers

Net iNcome: a Better Bottom LiNe

During the recession, revenues declined and firms kept profitability from collapsing by sharply cutting expenses. This year, however, expenses rose dramatically. Luckily for firms, revenue strongly outpaced expense growthand net income saw a strong 7.5% increase.
year Net iNcome per Lawyer

2006 2007 2008 2009 2010

$247,000 $260,000 $246,000 $253,000 $282,000