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Accounting and Financial Planning for Law FirmsFeaturesLaw Firm ManagementLaw Firm PartnersLaw Firm Profitability

Law Firms Need to Look At Partnership Behaviors to Manage Profitability

By Hugh A. Simons
May 01, 2021

There's a paradox at the heart of the legal marketplace: Clients are taking work away from traditional outside counsel and yet premier law firm profitability is at an all-time high. The resolution lies in the number of equity partners. In the decade following the 2007-08 Global Financial Crisis, while the number of in-house lawyers in the United States grew by 50%, the number of U.S.-based lawyers in the Am Law 100 was flat and the number of equity partners declined.

The drop in equity partners didn't come about by stopping promotions (indeed, promotion rates held constant); rather, firms shed their less-profitable practices and partners: they dropped inherently low-leverage flanker practices, pared back international operations, corrected promotion and lateral-hiring mistakes, and transitioned out less commercially capable partners within high-profit practices. Per-partner profitability rose just as would a student's grade point average if one dropped the classes with weaker results. In essence, the effect of external pressures on profitability was offset by changing the composition of partnerships.

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