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Non-equity partners cost more and bring in lower revenues than associates

21 February 2012

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By Manju Manglani, Editor (@ManjuManglani)

Research into the US legal market has found that productivity levels of income partners in top and mid-tier firms have consistently been 150 hours per year below that of equity partners and associates for the past decade.

It has also found that the increasing percentages of non-equity partners – attributable generally to more senior salaried partners and of counsel – have resulted in an overall increase in compensation costs to firms across the market.

In top-tier firms, the percentage of income partners increased from seven per cent in 2001 to 11 per cent in 2010. The percentage of counsel/of counsel increased from six to ten per cent in the same period, according to the 2012 Client Advisory report.

Among the mid-tier firms, the shift was more pronounced, with the proportion of income partners jumping from 11 per cent in 2001 to 21 per cent in 2010. The percentage of counsel/of counsel rose from eight per cent in 2001 to 11 per cent in 2010.

The percentage of associates in top-tier firms dropped from 85 per cent in 2001 to 73 per cent in 2010, and from 78 per cent to 63 per cent among mid-tier firms.

However, the costs associated with this more top-heavy leverage were not offset by more productivity and greater revenues between 2001 and 2010. On average, equity partners in top-tier firms billed about 1,760 hours each per year, associates billed about 1,770 hours and income partners billed 1,600 hours. In mid-tier firms, equity partners averaged about 1,690 billable hours, associates managed around 1,765 hours and income partners billed around 1,550 hours.

Law firms’ indirect and direct expenses have been increasing in both relative dollar terms and on a per-lawyer basis since 2010. The growth in direct expenses is noted as being partly due to the increasing unit cost of leverage in many firms.

This has been driven in large measure by the extensive layoffs of associates undertaken in 2008 and 2009 and exacerbated in many firms by increases in the number of income partners (sometimes as a result of de-equitisations).

In recent years, lateral acquisitions have become an increasingly popular means of expanding the equity partner ranks in the top 50 firms, accompanied by a marked reduction in the number of internal promotions.

The report notes that 2012 may prove even more challenging than 2009 in terms of profitability across the industry, due to continued slow growth in demand for legal services and rising firm expenses.

Billable hours in M&A and general corporate practices were essentially flat in 2011, while sharp declines were experienced in capital markets, tax and bankruptcy work. Only labour and employment, litigation, IP litigation and real estate practices showed positive demand growth in 2011.

The legal industry will experience only modest gains this year and national firms will increasingly look to capitalise on the growth in demand for legal services in emerging markets, according to the report. Cost-cutting will also be important, particularly in terms of business processes and lawyer remuneration structures.

Mergers are forecast to increase this year at a pace equal to or exceeding that of 2011. The number of mergers involving US-based law firms jumped by 67 per cent year-on-year in 2011 to 45 completed mergers, indicating a gradual return to pre-recessionary levels of 55+ mergers a year. By mid-February, 14 mergers of US firms were announced or became effective, double the level of a year ago.

The report is based on Hildebrandt Institute research into 116 US-based law firms and Citi Private Bank data on 205 US-headquartered firms, including 89 of the top 100 firms.

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