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Profitability

What dynamic firms can teach us about law firm profitability

A lot has happened globally over the last two years, but law firm profitability in the U.S. has remained stable. Even as the legal needs of clients shift and evolve in this new environment, legal buyers are primed to purchase, recognizing even more than ever the value of solid legal advice. They are also emerging from the pandemic-era zeroed in on belt tightening with a new focus on value and efficiency.

Whether it was increasing compensation or providing an optimum work culture, law firms in the U.S. kept going in the face of a global pandemic. Learn what the most profitable law firms did and what they’re doing now to remain at the top of their field as reported in the Thomson Reuters 2022 Dynamic Law Firms report.

What is a dynamic law firm?

For the purposes of the 2022 Dynamic Law Firms report, a Dynamic firm is one that is in the top quartile of firms in metrics such as revenue per lawyer, total profit, profit margin, and profits per equity partner (PPEP). Despite the challenges presented over the last two years, Dynamic law firms grew their total profit margin and PPEP at rate as fast (and in some cases faster) than they did in 2017-2020. Static firms, on the other hand, were actively reducing the number of equity partners in the firm while increasing the number of non-equity partners.

By the end of 2021, most Static firms had grown their PPEP nearly a full percentage point faster than Dynamic firms, a statistic which would cause 60% of those firms to be reclassified as Dynamic firms. With PPEP being a key driving success factor, the main difference between Dynamic and Static law firms is how they distribute firm profits to their lawyers.

What are the most profitable law firms doing?

The Dynamic Law Firms report indicates the most profitable law firms over the last two years are paying their lawyers more, linking performance to pay, supporting a collaborative culture, and remaining open to change.

Here’s a closer look at how Dynamic firms are distributing financial gains to their lawyers.

Higher compensation

What a company does with its profits says a lot about what they value. While both Dynamic and Static firms value their associates (as evidenced by increased compensation), Dynamic firms increased their associate compensation per associate full time equivalent (FTE) by 13.5%. Static firms increased pay to associates per associate FTE by only 8.6%.

Despite a global pandemic, Dynamic law firms were able to adapt and continue to provide increases in lawyer pay per associate FTE. This is a key indicator of law firm profitability.

Performance-linked pay

Opportunities for advancement and increased pay in Static firms are capped, with partners receiving a fixed rate of pay. This ties back to the PPEP of Static firms, demonstrating the PPEP has increased due to fewer equity partners rather than an increase of profits to distribute to those partners.

Dynamic firms, on the other hand, have shown a higher than average rate of equity partner promotion. This more heavily aligns compensation with firm performance, providing an incentive for equity partners to continue growing the firm and providing optimal service to their clients.

Collaborative culture

The culture at a Dynamic firm is one that recognizes the benefits of non-structured collaboration. This type of collaboration involves constant communication, delegation of work, and using communication tools other than email for dealing with both clients and colleagues.

Gone are the days of the strict corporate hierarchy. Instead, lawyers in Dynamic firms are more likely to receive support from their fee-earning colleagues.

Open to change

Dynamic firms are more willing to embrace change than Static firms. In the past, law firms have been reluctant to break away from hourly billing. This is something that is changing in recent times with Dynamic firms being less likely to use hourly billing than Static firms. They are also early adopters of technology and are comfortable talking about their environmental, social, and corporate governance services.

However, given all the positives associated with Dynamic firms, they fare less than average when it comes to billing realization. This is likely due to their rate increases which are more aggressive than those of Static firms. Even so, Dynamic firms are showing steady improvement in their realization rates over the last two years.

Key takeaways

Over the last two years, Dynamic law firms have proven their profitability through the financial gains they’ve experienced. Not only are these firms showing increased profits, but they are passing along more profits to their associates than Static firms, as demonstrated by an increase in equity partners. They’ve also shown they are adaptable by being open to changes such as billing methods and updated, more collaborative, corporate cultures.

How can technology help law firm profitability?

As mentioned above, firms that adopt new technology early better position themselves for success. For more information, read this blog on choosing a cloud-based solution for your law firm.

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