Despite Big Law Profit Drop, Expect Another Good Year

Big Law clearly benefited from the unprecedented financial conditions caused by the response to the pandemic. Lawyers working on mergers & acquisitions and capital market transactions—typically the industry’s biggest driver of profit—were working overtime, literally and figuratively.

Now, however, things are getting back to normal, and M&A and capital market transactions are slowing down. But evidence suggests that the large firm business model is actually healthier than ever.

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Law firms had to swell their ranks of lawyers last year in order to meet demand, but with that demand now slackening, those lawyers are less productive and their larger salaries are dragging down profit margins, which is hitting the bottom lines of firms hard.

Wells Fargo has noted that net income margins have decreased 14.3% from the same period last year, while Citi says a 14.7% growth in expenses has far outpaced a 5% growth in revenue during the first half of the year.

If those figures persist for the remainder of the year, it’ll be the largest drop in Big Law profits in at least a decade—but even with the drop, profit margins would be higher than they were in 2019.

Net income margins through six months of this year were 31%, compared to 28.5% in the first six months of 2019, according to Wells Fargo’s report.

Meanwhile, average lawyer productivity, or the number of hours billed per lawyer, is also up from 2019, despite a decrease from last year’s highs, and firms have still been able to raise their rates. Wells Fargo says there has been an increase of nearly 6% in standard rates in the first half of 2022 compared to the same period last year, showing that firms still have significant power over prices.

“Some people have seen the report and interpreted it as doom and gloom for the industry,” said Joe Mendola, the senior director of sales for Wells Fargo Private Bank Legal Specialty Group. “I don’t see it that way.”

Mendola doesn’t think this year will match last year, but that doesn’t mean there’s going to be a steep decline. “2022 may end up being the second-best year the legal industry has ever had,” he said.