Remaking News of the Week: Why PEPP averages mislead

In Australia, it’s the Royal Commission into Banking that’s generating super-profits for a few large firms. This is analysed in the Thomson Reuters State of the Legal Market 2018 Report curated by Joel Barolsky, a contributor to Dialogue. When demand shrivels, these good times won’t last.

Today, Nick Bruch’s Law.Com piece (1) features as Remaking News of the Week. In Law Firms Are More Profitable Than Ever. How are They Doing It? Nick brings us an analysis of how US BigLaw firms are increasing their profitability. He shows why economic  logic says this can’t continue without major remaking of the business model – which a few firms are doing with promising results.

Nick writes “Law firm profitability is at a record high. The average equity partner, at an Am Law 200 firm, received $1.8 million in profit sharing compensation last year. This is higher than any point in recorded history (the Am Law 200 data goes back to 1984). Average profits per equity partner are nearly $500k dollars more, in nominal terms, than they were at the peak in profitability experienced before the past downturn”. 

Nick’s analysis (acknowledging Hugh Simons) shows increases in revenue per lawyer are having the biggest impact for most firms in the Am Law 200. Followed by increases in associate (and non-equity partner) leverage, decreases in cost per lawyer and de-equitisation. Price increases are predictably and conspicuously absent from the profit-contributing levers.

So there you have it, just as Ben Farrow’s May 2016 Has the juice been squeezed from the BigLaw business model showed in a meta-analysis. Ben concluded “this business model has a ceiling, and it’s fast approaching”.

(1) Law.Com requires registration to access the full article.