Law firm profits per equity partner fell nearly 4% last year as the cost of a hiring spree dampened an increase in revenue, a Wells Fargo & Co. report found.
Hours billed per lawyer fell 6% to 1,568—the first time the figure fell below 1,600 in the 15 years Wells Fargo has been doing the report. Headcount grew 4.5% after firms hired to cope with a 2021 surge in work, the report said.
“We are concerned about the excess capacity in the industry,” Owen Burman, managing director of the bank’s legal specialty group, said in an interview. “We did see quite a few firms with very low productivity levels that are probably not sustainable.”
The productivity drop came in what otherwise was a good year for major law firms, with revenue growing 3%, Wells Fargo found. Hourly rates rose nearly 6%, according to the report, based on a survey of more than 140 law firms.
“Rate growth can only offset so many hours,” Burman said.
The results are in line with expectations of a reset after a record setting 2021 fueled by corporate practices that dried up for most of last year.
The 2021 corporate deal flow “was completely atypical and quite frankly unsustainable,” Winston & Strawn chairman Tom Fitzgerald said. “Last year was much more consistent. And to fill in that gap last year, litigation has had a marked increase across the board.”
Still, law firms didn’t give up all the gains they made during their record pandemic run. Profits per equity partner remain elevated from pre-pandemic levels after a 19% spike in 2021.
Firms anticipate demand growth this year of 1.6%, Burman said. That could equate to revenue growth of greater than 5% in 2023 if firms are able to push through the record rate increases they’ve projected.
A handful of law firms, including Goodwin Procter, Cooley, and Kirkland & Ellis have trimmed their associate ranks as demand declined. That list could grow if demand didn’t pick up, Burman said.
“Everyone is quite sanguine, and that’s probably not the perspective they should be taking,” he said.
Managing partners have signaled that profits are likely to decline, said Kay Hoppe, a veteran legal recruiter based in Chicago. But top firms have remained bullish on their long-term plans and are still targeting growth, she said.
“It’s not their first rodeo,” Hoppe said. “They are not overreacting.”
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