De-equitization is the elephant in the room in BigLaw’s profit distribution

The annual ritual of the release of the Am Law 100 financial results is playing again. In 1979 Steven Brill launched American Lawyer and brilliantly used the Am Law 100 league table as a marketing tool. In doing so Steven allowed elephants into the room. In this post, I (re)make a few comments on the merits and dangers of league tables, making the point that de-equitization is the elephant in the room in BigLaw’s profit distribution.

The Global Legal Post leads with this headline “Top 100 US law firms post biggest gains since 2010 their highest growth since 2010, the latest AmLaw 100 report reveals“.
Gross revenue is up 5.5% on average, net income 6.1%, PPP 6.3%, RPL 3.2%, and headcount 2.2%.
The stratification apparent in prior years continues with firms in the top half of the 100 are growing faster than those in the bottom half.
Roy Strom (right) gets tantalizingly close to the major PPP driver in his story The Big Picture “Revenue grew at its fastest rate since the big dipper, up 5.5 percent to a record $91.4 billion. Net income—the pool of money firms pay out to their ever-shrinking equity partnership—did even better than the top line, increasing 6.1 percent” (emphasis added).
Gina Passarella, Editor-in-Chief of American Lawyer, comments The drumbeat was steady. The observers, myself included, were relentless. External pressures on law firm business models were mounting and firms had to act fast. They just weren’t doing enough to meet new market realities—or, for some, to survive. Maybe they listened. Maybe they had enough of the talk. But something happened in 2017, particularly in the second half of the year, that spurred law firms to post their best gains in about a decade. Perhaps a proverbial middle finger to the critics? Perhaps the critics were dead wrong? Perhaps the industry is turning a corner that no one saw coming? Or perhaps our definitions of success have shifted in a decade?
I think it’s too early to tell Gina. Two points and incomplete data don’t prove a point.
And there are other factors that the Am Law tables don’t report. Most importantly is the number of equity points on issue in a firm (the basis on which PPP is calculated) and in which direction equity on issue is moving–the point made above by Roy Strom.
Most, admittedly not all, firms I know are systematically de-equitizing and relentlessly cost-cutting. And this is what’s keeping PPP high.
Logically, neither route is indefinitely sustainable. That’s where remaking their business models comes in. De-equitization is the elephant in the room in BigLaw’s profit distribution. It’s a tactical fix to a structural problem.

More on this subject

Has the juice been squeezed from the BigLaw business model? by Ben Farrow

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Heather Suttie

Thanks for your astute and sensible point of view, George. I concur. I also believe the AmLaw 100 financial results to be one of the most detrimental marketing tools a firm could use to heighten profile. That’s because the only thing it instills is that greed wins. Profit per partner (PPP) has nothing to do with firm profitability, and even less to do with skillful efficiency and sterling service to clients. As for de-equitizing, like you, many firms I know are removing equity partners with swiftness and stealth. While partners left standing get bigger pieces of equity pie, de-equitizing erodes trust especially from those aspiring to make their career inside a firm as well as skittish clients who aren’t sure if their lawyer’s head might be next on the chopping block and so spread work around to various firms in order to hedge their bets. The traditional law firm structure will, hopefully sooner rather than later, be replaced by structures more common and time-proven in other forms of business. Law firms that restructure now will be high and dry while those who don’t will be like swimmers when the tide goes out fast: We’ll know who wasn’t wearing a bathing… Read more »