Profitable Law Firms of All Sizes Share Economic Similarities, Survey Finds
Newtown Square, PA, July 22, 2002 — The newly released Altman Weil 2002 Survey of Law Firm Economics reports that in 2001 the 25% most profitable law firms in each of the six size categories surveyed billed at higher rates, worked more hours and were more leveraged with associates and paralegals than the least profitable 25% in the same category. Additionally, the most profitable firms spent more per lawyer on overhead.
“Aside from the important issues of leadership, management and strategy, the most profitable law firms clearly share a similar economic model that produces results,” notes Altman Weil principal James D. Cotterman. “The Survey bears out what we see in our consulting work with law firms.”
Revenue
The Survey reports national average gross receipts per lawyer in firms of all sizes rose 7.5% in 2001 to $363,610. Average net revenue per lawyer was up 7.7% to $208,490.
While both gross and net numbers increase relative to firm size, there were also dramatic differences within size categories. The 25% most profitable (4th Quartile) firms in each category produced from 50% to 140% higher revenues per lawyer than the 25% least profitable (1st Quartile) firms in the same category, and 20% to 60% more than their category’s average.
Expenses
Average total expenses per lawyer in all law firms were up 7.3% in 2001 to $155,120, according to the Survey. Expenses include occupancy, equipment, support staff, reference materials, marketing and other miscellaneous outlays.
Expenses per lawyer increase with size of firm, but the Survey also found wide variation within size categories. The 4th Quartile, high-performing firms spent from 20% to 60% more per lawyer than the 1st Quartile firms in the same size category and 10% to 30% more than their category’s average.
“The fact that the most profitable firms spend the most may seem to contradict conventional wisdom of economies of scale and lowest cost producer models,” says Altman Weil’s Cotterman. “But law firms that invest in infrastructure, training, marketing and the like can attract high caliber lawyers and command high rates. It creates a competitive advantage.”
Hours/Rates/Leverage
Standard median hourly billing rates increased 6.4% for equity partners, 11.9% for non-equity partners, and 9.7% for associates in 2001. Median annual billable hours for partners and associates were virtually unchanged nationally from the previous year. Associate leverage increased from .69 to .72, while paralegal leverage was unchanged. 4th Quartile firms showed the most significant differences from others in their size categories in rates and leverage.
Compensation Up, Except for New Grads
The Survey reports median total compensation (salary, bonus and benefits) for equity partners nationally rose 6.4% to $240,311, and was up 13% to $109,424 for associates. However, starting salaries for law school graduates hit a brick wall in 2001, rising an insignificant fraction of a percent – and contrasting sharply with the 16.7% increase the previous year.“What we’re seeing with salaries for new graduates mirrors events of over a decade ago,” comments Cotterman. “From 1985 to 1989 those salaries rose 39% before flattening out in response to the recession of ‘90-‘91. A similar cycle began in 1998 in Silicon Valley causing a 32% increase in starting salaries over three years until the bubble burst. Now we may see much the same stagnation as we did in the ‘90s.”
The Survey of Law Firm Economics has been published annually since 1972 by Altman Weil Publications, a subsidiary of Altman Weil, Inc., a global legal management consultancy headquartered in suburban Philadelphia. The Survey focuses on law firm revenues and expenses, leverage, billable hours, overhead, margin, billing rates, compensation and more. It lets law firms compare performance data with peer firms in similar size, geographic and practice categories.
Participation in the Survey has increased for the fifth consecutive year. Over 20,000 lawyers from 401 U. S. law firms participated in this year’s survey, including 10,413 partners/shareholders, 9,048 associates and 976 active counsel.
The Survey may be purchased for $725 from Altman Weil Publications, Inc. The 2002 Altman Weil Small Law Firm Economics Survey, which contains data from participating firms with one to twelve lawyers, is available for $395. Orders and inquiries may be made by calling 888-782-7297.
Altman Weil Publications conducts and publishes numerous surveys of the legal profession including the Managing Partner and Executive Director Survey, the Retirement and Withdrawal Survey for Private Law Firms and the Law Department Compensation Benchmarking Survey. For additional information visit our website at www.altmanweil.com.
