The American Lawyer’s annual ranking of law firms by size and economic performance is law’s version of the Oscars. It is highly anticipated, widely viewed, and the subject of considerable discussion. It has been a staple of the legal industry since its inception in 1986. What began as the 200 largest, most profitable firms—‘The AmLaw200’– gave way to the AmLaw100. This year’s rankings revealed a growing divide between the top and bottom halves of those 100 firms. The top 50 firms are going strong while the bottom tier shows stress cracks, notably a drop in revenue per lawyer. It might well be ‘The AmLaw50’ in next year’s survey. The 2017 Georgetown Report, another legal industry bellwether, reveals that 20—not 50—firms have achieved fiscal separation and are in a league of their own. What is the significance of the winnowing of 200 surveyed firms to a fraction of the original number?
Flashback to 1986– Steve Brill, Finley Kumble, And The AmLaw 200
Steve Brill, the founder of The American Lawyer, was fascinated by the business of law and used his storytelling, investigative, and marketing skills to capture a large readership. He cast a bright light on an industry that had long operated as a gentlemen’s club where money and machinations remained on the down low. Brill brought readers into that club, exposing it as something less than collegial. His blockbuster articles on Finley Kumble, a renegade firm that quickly grew to be the nation’s second largest, drew widespread notice. Finley was brash, powerful, colorful, at times lurid, and the forerunner of ‘the modern law firm.’ Brill chronicled its mercurial rise and catastrophic fall with details worthy of Hollywood. Finley was the first law firm to flout white-shoe convention of not raiding partners from other firms. When, as Brill called it, ‘The Finley Man’ knocked, eye-popping offers followed. Steve Kumble became law’s Gordon Gekko.
As the Finley drama was headed towards its denouement, Brill unveiled The American Lawyer’s inaugural law firm survey. Never before had firm finances been divulged—much less compared– publicly, and it drew an outcry from the legal establishment. But once profit-per-partner (PPP) was there for all to see, it became the metric of the legal industry—and remains so today. Brill’s AmLaw200 survey ignited lateral movement and promoted legal free agency. It advanced what Finley Kumble had pioneered and fostered an obsession with PPP. Legal practice became the business of law.
The timing for Brill and law firms was perfect. Firms were doing well in the ‘80’s, and they were about to ride a two-decade wave of client global expansion that saw them ‘follow the money’ across the country and the world. New offices meant more lawyers and higher PPP. Billable hours increased and so did rates and billable hours.Partner compensation soared. Demand for law firm services outstripped supply of legal talent; there was plenty of work to go around. Law firms were the only game in town. That’s why there was an ‘AmLaw200.’ In fact, the rival National Law Journal created its own annual survey that ranked 250 firms. No one questioned—much less competed with—the incumbent partnership model. ‘For services rendered’ was still a common way firms presented a bill, and write-offs, write-downs, and discounts were rare. In-house legal departments tended to have close ties with their outside counsel, and the vast majority of legal work—especially litigation and complex corporate matters–was outsourced to firms. Young lawyers usually eclipsed ever increasing billable hour quotas in the hope of achieving the brass (platinum?) partnership ring. The partnership model was made for this market. The AmLaw200 were largely undifferentiated big box stores about to get much bigger—and more profitable. The fact that they were largely undifferentiated was of little moment because the myth was that everything they worked on was ‘bespoke.’
Fast Forward To The Present: The Real Story Behind The Shrinking AmLaw200
At first blush, the boom times for large firms continue– at least if PPP is the measure. But PPP can create a false positive of firm health. It does not reveal, for example, what partners do—and do not do—to prop it up. Nor does it touch upon the reasons underlying client dissatisfaction that have resulted in declining demand for law firms in a rising market. That includes: firm stratification, consolidation, the traditional partnership model’s misalignment with clients’ elevated value expectations, heightened and expanded competition, technology, the complexity of clients’ business, and a ‘faster, better, cheaper’ client mentality that has created a new legal buy/sell dynamic where firms are no longer the default providers. That is the real story of the shrinking AmLaw200.
Legal consumers are segmenting their portfolios as never before—by practice area, value, price, complexity, and risk profile. They are disaggregating tasks, considering new provider options, and exercising leverage in a buyers’ market. Three salient exceptions to this new legal buy paradigm are: (1) high value (‘bet the company’) matters that are price insensitive; (2) cross and multiple border transactions/litigation; and (3) challenges that demand specialized expertise—or influence—not resident in-house. These matters are predominantly assigned to a handful of elite firms. They dominate a rarified segment of the market willing to pay premium rates and reticent to retain other firms. That means that premium work—about 1% of all matters that comprise 12-15% of total spend—still goes to a small cadre of firms. ‘Fat middle’ matters—everything between high-end and repetitive, high volume/low value ‘commoditized work’– were long touted by firms as ‘bespoke’ and commanded premium rates without meaningful budgets. That myth and cavalier fiscal practice have vanished, and that’s another reason why the AmLaw 200 has shrunk.
Firms not among the elite group of 20 would be prudent to take a long, hard look in the existential mirror, because the days of being ‘all things to all clients’—at premium prices–are over. Differentiation is the path forward, and that means firms must have specialized expertise, understand clients’ business, consistently deliver efficient, cost-effective, and value-driven services and products, deploy technology effectively, adopt process and process management skills, collaborate seamlessly with clients and others in the supply chain, achieve strong, measurable results, and implement a client-centric approach. That will require serious soul searching, reorganization, and a fresh perspective on what it means to be a law firm in today’s marketplace.
The market has put law firms on notice, and they should govern themselves accordingly.
This post was originally published on Forbes.com.