In its annual survey of law firms, Wells Fargo’s Legal Specialty Group found that most firms reported increased revenue in 2021, with the top 50 firms reporting 16% growth on average.
In its annual survey of law firms, Wells Fargo’s Legal Specialty Group found that most firms reported increased revenue in 2021, with the top 50 firms reporting 16% growth on average. Yet, despite their success, law firms are not sharing ownership opportunities with the associates and non-equity lawyers who fuel their extraordinary growth: the top 100 firms increased their equity partner ranks by just 0.2%. So what’s going on?
The Analysis
The primary driver is the phenomenon of the “non-equity” partner: a title with little economic benefit. Equity partner profitability relies on leverage, i.e., a bottom-heavy structure that gives the equity partners a cut of the fees billed and collected by the numerous “non-equity partners” and other lawyers at the firm. At some firms, non-equity partners make less than senior associates for the first few years given capital contribution requirements. Non-equity partners, as indicated by their collective name, are not allowed to participate in firm profit distribution.
This structure makes firms “revenue sensitive,” meaning they can increase profits more easily by squeezing extra hours from non-equity lawyers than they can by cost-cutting (or innovating). The result is that billable requirements have skyrocketed from around 1,700 in the 1980s to a staggering 2,200 at some firms today. And, to maintain profitability, firms have consistently promoted fewer equity partners, leaving many attorneys to seek better opportunities elsewhere.
At the same time that the demands on non-equity attorneys have increased, the path for those looking to be promoted has lengthened dramatically–and in reality is closed to most. The predictable impact on attorney work/life balance has also made career progress difficult for lawyers with families, and particularly for women.
Clients have also felt the consequences of an hours-based system as attorneys are both incentivized to bill excessively, but also are overworked and often cannot provide value to the clients paying for legal services. Clients also face increasingly exorbitant attorney rates–with even associates charging up to $1,000 at major firms–which continue to increase to cover salaries, equity partner profitability, and the expensive real estate necessitated by longer in-office work hours.
Ultimately, by pushing rates and hourly requirements up, and closing the equity partner track for most lawyers, firms have funneled much of their increased revenue to a smaller and smaller cadre of highly paid equity partners. In the Am Law 100, for example, firms have promoted 20% fewer lawyers to equity partner since 2000.
What’s Next
Major firms can continue reporting impressive increases in profits per equity partner (PPP), but only by limiting ownership. Since PPP numbers, and not the odds of making equity partner at a firm, are the focus of AmLaw scorekeeping and firms’ recruiting efforts, law firm prestige will continue to rely on shrinking, not growing, the equity partner ranks. As a result, retention, inclusion, and diversity will continue to decline at leading firms, even as profits go up.