2014
A Market Analysis of the 200 Largest Law Firms: Part 1
Data Source: American Lawyer Analysis by Lawyer Metrics
Webinar 13 ăƒť November 2015
Overview
Why are some large law ďŹ rms more proďŹ table than others?
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Figure 1: Average Partner Compensation, FY2010–FY2014 Baker Donelson K&L Gates
200
Count of Firms
150
100
Alston & Bird Orrick
50 Cravath Davis Polk Data Source: American Lawyer
0
0
2,000,000 4,000,000 Average Partner Compensation (1 Bin = $100K)
6,000,000
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Figure 2: Average Partner Compensation vs. Profits Per Partner, FY2010–FY2014 (Two-Tier Partnerships Only) 5,000,000
Correlation = 0.95
Profits Per Partner
4,000,000
3,000,000
2,000,000
1,000,000
0
Data Source: American Lawyer
0
1,000,000
2,000,000 3,000,000 Average Partner Compensation
4,000,000
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What predictors differentiate more and less profitable firms?
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Conceptual Model
Outcome = Predictors + ϵ (Error Term) Profitability = Predictors + ϵ
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Predictors of ProďŹ tability
Potential Predictors: 1. Firm Structure (Leverage Model) 2. Geography (HQ Location/Market) 3. Geographical Concentration (Low vs. High) 4. Client Industries 5. Practice Areas/Expertise 6. Partner Demographics (Age) 7. Lateral Activity 8. Quality of Firm Management (Ͼ) Note: Part 1 focuses on 1–3 above.
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Leverage, Geography and ProďŹ tability
Leverage Models
Pyramid Model
Diamond Model
Equity Partners Partners Non−Equity Partners Counsel Staff Attorneys
Associates
Associates
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Three Leverage Types A clustering algorithm classifies AmLaw firms into three types based on the percentages of equity and non-equity partners, associates, and other attorneys: Pyramid Firms Relative to the percentage of equity partners and associates, pyramid firms have a small percentage of non-equity partners and other attorneys. Mixed Firms Relative to the percentage of equity partners and associates, mixed firms have a modest percentage of non-equity partners and other attorneys. Diamond Firms Relative to the percentage of equity partners and associates, diamond firms have a large percentage of non-equity partners and other attorneys.
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Figure 3: Percentage Share for Each Leverage Type, FY1998–FY2014 100
Diamond Percentage Share
75
50
Mixed
25
Pyramid 0
2002
2007 Fiscal Year
2012
2017
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Figure 4: Average Partner Compensation by Leverage Type, FY2010–FY2014 $1,662,467 Data Source: American Lawyer Analysis by Lawyer Metrics
Average Partner Compensation
1,500,000
1,000,000
$866,931 $606,828 500,000
0
Pyramid
Mixed Leverage Type
Diamond
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Geography: HQ Location/Market
HQ Location/Market The U.S. metro area in which a given ďŹ rm has the highest percentage of attorneys.
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Figure 5: Median Average Partner Compensation by HQ Location/Market, FY2010–FY2014
HQ Location/Market
Overall Median New York−Northern New Jersey−Long Island, NY−NJ−PA San Jose−Sunnyvale−Santa Clara, CA Washington−Arlington−Alexandria, DC−VA−MD−WV Houston−Sugar Land−Baytown, TX Chicago−Naperville−Joliet, IL−IN−WI Los Angeles−Long Beach−Santa Ana, CA Boston−Cambridge−Quincy, MA−NH Reading, PA Atlanta−Sandy Springs−Marietta, GA Dallas−Fort Worth−Arlington, TX Richmond, VA Charlotte−Gastonia−Concord, NC−SC Minneapolis−St. Paul−Bloomington, MN−WI Philadelphia−Camden−Wilmington, PA−NJ−DE−MD Denver−Aurora, CO San Francisco−Oakland−Fremont, CA Pittsburgh, PA Phoenix−Mesa−Scottsdale, AZ Cleveland−Elyria−Mentor, OH Miami−Fort Lauderdale−Pompano Beach, FL Columbia, SC Birmingham−Hoover, AL Nashville−Davidson−−Murfreesboro−−Franklin, TN Seattle−Tacoma−Bellevue, WA Portland−Vancouver−Beaverton, OR−WA St. Louis, MO−IL Winston−Salem, NC Kansas City, MO−KS Columbus, OH Hartford−West Hartford−East Hartford, CT Milwaukee−Waukesha−West Allis, WI New Orleans−Metairie−Kenner, LA Toledo, OH Memphis, TN−MS−AR Detroit−Warren−Livonia, MI Omaha−Council Bluffs, NE−IA Orlando−Kissimmee, FL Cincinnati−Middletown, OH−KY−IN Buffalo−Niagara Falls, NY San Diego−Carlsbad−San Marcos, CA Akron, OH
500,000
1,000,000
1,500,000 Median
2,000,000
Note: The horizontal gray bars represent the 25th and 75th percentile values. 18 / 26
Geographical Concentration
Herfindahl Index A numerical scale (ranges from 0 to 1) that measures extent to which a firm’s attorneys are geographically diffuse/concentrated across offices. 0 = Very Diffuse 1 = Very Concentrated
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Figure 6: Average Partner Compensation by Geographical Concentration, FY2010–FY2014
Average Partner Compensation
5,000,000
Data Source: American Lawyer Analysis by Lawyer Metrics
Correlation = 0.39
4,000,000
3,000,000
2,000,000
1,000,000
0.00
0.25
0.50 Herfindahl Index
0.75
1.00
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Integrated Analysis
Figure 7: Average Partner Compensation, FY2010–FY2014
Average Partner Compensation
5,000,000
Data Source: American Lawyer Analysis by Lawyer Metrics
Leverage Type Pyramid Mixed Diamond
4,000,000
3,000,000
2,000,000
1,000,000
0.00
0.25
0.50 Herfindahl Index
0.75
1.00
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Table 1: Average Partner Compensation ($ Millions) by Leverage Type and Office Concentration
Office Concentration Very Diffuse Somewhat Diffuse Somewhat Concentrated Very Concentrated
Leverage Type Pyramid Mixed Diamond $1.29m $0.88m $0.55m $1.51m $0.75m $0.63m $1.39m $0.82m $0.63m $1.98m $1.15m $0.66m
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Counterintuitive Findings
Profitability is: ▶
Negatively correlated with “Diamond” leverage.
▶
Negatively correlated with more diffuse geographic footprint.
Action items: ▶
Identify firms that are outperforming their leverage and geographic endowments.
▶
Identify strategy and management factors that could explain superior performance with similar assets.
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Potential Predictors: 1. Firm Structure (Leverage Model) 2. Geography (HQ Location/Market) 3. Geographical Concentration (Low vs. High) 4. Client Industries? 5. Practice Areas/Expertise? 6. Partner Demographics (Age)? 7. Lateral Activity? 8. Quality of Firm Management (ϵ)? Note: In the end, this series (Parts 1–3) will use regression analysis to identify the relative importance of factors 1–8 for large law firm profitability.
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