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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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Profile for Lawyer Metrics

Market Analysis of the 200 Largest Law Firms  

The first in a two-part series, this webinar shows how a firm’s leverage model, location of headquarters or largest office, and geographic c...

Market Analysis of the 200 Largest Law Firms  

The first in a two-part series, this webinar shows how a firm’s leverage model, location of headquarters or largest office, and geographic c...

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