Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at why law firms aren’t firing associates who are working less and getting paid more than ever. Sign up to receive this column in your Inbox on Thursday mornings.
Nobody says life is easy for the lowest lawyers on Big Law’s totem pole. They are known to grind overnight and work plenty of weekends. Partners can be, well, demanding.
But associates have never had it better than they do right now.
Big Law associates have never logged fewer hours and never brought home bigger paychecks. Who doesn’t like working less and getting paid more?
A combination of stagnant demand for Big Law time and law firms’ newfound unwillingness to reduce headcount has driven the average hours lawyers worked at the top 100 firms to its lowest point on record, according to data from Wells Fargo’s Legal Specialty Group. At the same time, associate compensation has risen to record highs.
Lawyers at those top firms billed an average of 1,551 hours last year. That’s down from an all-time peak in 2021 of 1,683 hours, Wells Fargo data show.
It might not sound like much. It works out to about 2.5 hours of extra time per week. Hit the Peloton, go see a movie, give yourself a little treat. You’ve earned it.
For law firms, the loss of productivity represents a hit to revenue that could theoretically stretch north of $100,000 per associate, assuming a billing rate of $775 an hour. That’s a real rate that exists for 2023 law school graduates. Higher ones do too. In a quick search, I found last year’s law school grads billing rates as high as $885 an hour.
A six-figure loss per associate might sound hefty.
But here’s the catch: That loss assumes the billing rates stayed constant.
And everybody knows: The billing rates do not stay constant.
In 2021, the peak of associate productivity, I found first-year associates at one firm charging $765 an hour. Two years later, with productivity at all-time lows, the same firm (which doesn’t really need to be named, the figures are similar enough across top firms) was charging $885 an hour for 2023 graduates.
If you do the math, the less-busy, more-expensive 2023 associate generates about 6.5% more revenue ($1.34 million) than the harder-working, less-paid 2021 associate ($1.29 million). That’s assuming firms collect 100% of bills, which isn’t realistic. But so-called realization rates have only slipped a little in two years. The difference is far more than the salary gains for associates.
Wells Fargo legal specialty group managing director Owen Burman told me this phenomenon explains why law firms haven’t en masse reached for the pink slips as productivity declined. (Yes, there’s been some layoffs, but nothing like those in the wake of the Great Financial Crisis, evidenced by the fact that headcount continues to grow.)
Associate billing rates have risen so quickly in recent years that firms don’t need those lawyers to work as many hours to reach similar profitability levels.
“They can be as profitable for the law firm at a lower utilization than they used to be,” he said.
Law firms pushed through the biggest billing rate increases in history last year, north of 8%, Wells Fargo has said. They are on pace to seek a similar increase this year, Burman said.
That might set off some alarm bells for clients. Law firms have raised rates so quickly that they’re just as profitable employing more lawyers than they’ve historically needed—at salaries that have never been higher.
Enjoy the good times for now, associates.
Burman and others expect 2024 to be a busier year for law firms, with major corporate transactions expected to pick up. Associates will likely be working longer hours.
The good news for law firms?
The increased productivity from all the associates they kept on the payroll will drop straight to the bottom line.
Worth Your Time
On Big Law Finances: The country’s 100 largest law firms posted revenue growth of 6% in 2023 as higher prices for lawyers’ time and a slight increase in demand more than made up for a broad slowdown in deals, a Wells Fargo & Co. survey found.
On The PGA Tour: At least five law firms advised on a deal infusing a new for-profit arm of the PGA Tour with up to $3 billion, part of which will provide an equity stake to tour members. The deal with Strategic Sports Group involved law firms Wachtell, Lipton, Rosen & Katz, McDermott Will & Emery, Hogan Lovells, Shearman & Sterling, and King & Spalding.
On Legal Malpractice Claims: Law firms are being targeted with increasingly expensive lawsuits, as large insurance policies, client resistance to paying fees and the role of investors in litigation put legal operations on the defensive, Tatyana Monnay reports.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.