Law Firm Economic Cycles -- Part II

This post continues the serialization begun yesterday of findings from analyses I performed last fall as my law firm clients were considering how best to respond to the economic downturn. To help them, I parsed US law firm performance data, particularly those from 1989-1996 to identify precursors to and impacts of the 1990-91 recession on law firms’ financial performances.

As noted yesterday, I have long since shared the insights gleaned from my analyses and their early warning benefits with my own clients. Therefore, it’s now appropriate to share them with a larger audience. Which brings us to today's post.

3. Higher-end firms suffer longest from recessions.

Partners at firms with the highest-end practices should manage particularly downward their expectations of an early recovery. A severe recession’s impacts are generally felt longer by the most profitable law firms, which rely on a stream of complex, high-value deals and, therefore, must wait longer for that level of economic activity to reappear and stabilize.

Evidence of the long-lasting effects of severe global recessions on highest-end law firms is offered by their performances during the early 1990s. After 1989, seventeen of that year’s twenty most profitable US law firms failed to produce profits per partner (PPP) higher than their 1989 PPP during at least four of the seven following years.

Overall, the most profitable law firms suffer the longest recession impacts. For example, twelve Am Law 100 firms failed to produce higher PPP for all seven of the years following 1989; these firms included Cahill, Cravath, Davis Polk, Gibson Dunn, Kaye Scholer, O’Melveny, Paul Weiss, and Skadden. Eight more Am Law firms failed to exceed 1989 PPP for six of the following seven years; these firms included Kirkland, Latham, Milbank, Wachtell, and Willkie Farr.

4. Lower-end firms tolerate recessions better and recover from them faster.

The data also show that those firms that generally feel a deep recession’s impacts for the shortest time are less profitable firms with low billing rates and the lowest profits per partner. Even in depressed times, day-to-day legal work does not subside.

Note: The two findings described above are brightly demonstrated by the data in a chart (click here) that I simply was unable to figure out how to include here (I welcome any advice and help from readers about how to do this).