A Market Analysis of the 200 Largest Law Firms: Part 2
Data Source: American Lawyer Analysis by Lawyer Metrics
Webinar 14 ăƒť February 2016
Leverage Ty Diamond Mixed Pyramid
Review of Part 1
Why are some large law ďŹ rms more proďŹ table than others?
5 / 30
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
6 / 30
What predictors differentiate more and less profitable firms?
7 / 30
Conceptual Model
Outcome = Predictors + ϵ (Error Term) Profitability = Predictors + ϵ
8 / 30
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 (Ďľ)
9 / 30
Table 1: Average Partner Compensation 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
10 / 30
Table 2: Average Partner Compensation 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
11 / 30
Summary of 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.
12 / 30
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 (Ďľ)
13 / 30
Client Industries
Measuring Client Industries
▶
Measure law firm-corporate client relationships using ALM’s In-House Law Departments data.
▶
Classify corporate clients by industry using Lawyer Metrics’ NAICS-based classification scheme.
▶
Data are counts of observed entries – i.e., the number of times a client relationship involved a particular industry.
15 / 30
Figure 2: Fortune 500 Representation, Top 20 by Client Industry Morgan Lewis & Bockius Ogletree Deakins Littler Mendelson Jackson Lewis Jones Day Seyfarth Shaw Gibson Dunn Sidley Austin
Client Industry
Skadden Arps
Energy
Kirkland & Ellis
Finance Health Care and Life Sciences
DLA Piper
Insurance
Hunton & Williams
Manufacturing and Production Real Estate
Fulbright & Jaworski
Technology
Davis Polk
Telecommunications and Media
Bryan Cave
Transportation
Reed Smith
Utilities Wholesale, Retail, and Service Industries
Baker Botts Baker & McKenzie
Data Source: ALM Legal Intelligence Analysis and Results By Lawyer Metrics
Weil Gotshal & Manges Greenberg Traurig 0
100
200
300
400
500
Client Industry Counts
16 / 30
Figure 3: Client Industry Counts and Average Partner Compensation Energy
Finance
Health Care and Life Sciences
Insurance
Manufacturing and Production
Real Estate
Technology
Telecommunications and Media
Transportation
Utilities
Wholesale, Retail, and Service Industries
15
Average Partner Compensation (Five−Year Mean, Log Scale)
14 13
15 14 13
15 14 13 0
1
2
3
4
5
0
1
2
3
4
5
0
1
2
3
4
5
Client Industry Counts (Log Scale)
17 / 30
Practice Areas/Expertise
Measuring Practice Areas/Expertise
▶
Measure law firms’ practice area expertise using ALM’s In-House Law Departments data, which covers six broad areas: 1: Corporate Transactions 2: Intellectual Property 3: Labor and Employment 4: Litigation 5: Patent Prosecution 6: Securities Law
▶
Data are counts of observed entries – i.e., the number of times a client relationship involved a particular practice area.
19 / 30
Figure 4: Fortune 500 Representation, Top 20 by Practice Area Morgan Lewis & Bockius Ogletree Deakins Littler Mendelson Jackson Lewis Jones Day Seyfarth Shaw Gibson Dunn Sidley Austin Skadden Arps Kirkland & Ellis
Practice Area
DLA Piper
Corporate Transactions Intellectual Property
Hunton & Williams
Labor and Employment
Fulbright & Jaworski
Litigation
Davis Polk
Patent Prosecution Securities Law
Bryan Cave Reed Smith Foley & Lardner McGuireWoods
Data Source: ALM Legal Intelligence Analysis and Results By Lawyer Metrics
Vinson & Elkins Greenberg Traurig 0
200
400
Practice Area Counts
20 / 30
Figure 5: Practice Area Counts and Average Partner Compensation Corporate Transactions
Intellectual Property
Labor and Employment
Litigation
Patent Prosecution
Securities Law
Average Partner Compensation (Five−Year Mean, Log Scale)
15
14
13
15
14
13 0
2
4
6 0
2
4
6 0
2
4
6
Practice Area Counts (Log Scale)
21 / 30
Regression Results
Regression Model
Outcome = Predictors + ϵ (Error Term) Profitability = Predictors + ϵ
23 / 30
Multivariate Analysis of Average Partner Compensation
▶
Regression analysis was used to explore differences in compensation while accounting for numerous predictors simultaneously, including leverage model, geography, client industry and practice area expertise.
▶
Results of this analysis present the “purified” associations between average compensation and each predictor while all else is equal.
24 / 30
Figure 6: Predictors of Average Partner Compensation PA: Corporate Transactions Office Concentration Leverage = Pyramid PA: Litigation
Relationship Negative Positive
Industry: Technology Industry: Telecommunications and Media Leverage = Mixed
Predictor
Industry: Energy PA: Intellectual Property PA: Labor and Employment Industry: Real Estate Industry: Finance PA: Patent Prosecution Industry: Insurance Industry: Transportation Industry: Manufacturing and Production PA: Securities Industry: Wholesale, Retail Service Industry: Utilities Industry: Health Care and Life Sciences −300K
Overall Average (~$460K)
+300K
+600K
Average Partner Compensation ($ Thousands)
25 / 30
Figure 7: Average Partner Compensation: Differences by Selected Headquarters Markets New York−Northern New Jersey−Long Island, NY−NJ−PA Los Angeles−Long Beach−Santa Ana, CA Atlanta−Sandy Springs−Marietta, GA San Jose−Sunnyvale−Santa Clara, CA Boston−Cambridge−Quincy, MA−NH Washington−Arlington−Alexandria, DC−VA−MD−WV
HQ Market
Chicago−Naperville−Joliet, IL−IN−WI San Francisco−Oakland−Fremont, CA Dallas−Fort Worth−Arlington, TX San Diego−Carlsbad−San Marcos, CA Philadelphia−Camden−Wilmington, PA−NJ−DE−MD Miami−Fort Lauderdale−Pompano Beach, FL Charlotte−Gastonia−Concord, NC−SC Minneapolis−St. Paul−Bloomington, MN−WI St. Louis, MO−IL Houston−Sugar Land−Baytown, TX Seattle−Tacoma−Bellevue, WA
−500K
Overall Average (~$460K)
+500K
Average Partner Compensation ($ Thousands)
26 / 30
Summary of Findings
Profitability is significantly related to both types of clients and types of work: ▶
The more technology/telecommunications clients at a firm, the higher the profitability.
▶
The more corporate transactions and (some) litigation work, the higher the profitability.
Action items: ▶
Recognize that strategic opportunities exist on both industry and practice dimensions.
27 / 30
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 (Ďľ)?
28 / 30