Trends in law firm profitability suggest smartest route for future law students

At the National Association for Law Placement’s annual conference in late April, Dan DiPietro of Citibank spoke to a packed house of more than 800 conference goers. DiPietro is the managing director of the Law Firm Group at Citibank and visiting professor at Harvard Law School.

Citibank’s Law Firm Group provides advice and services to over 650 law firms in the United States and London. The group lends to more than 200 law firms in the U.S. and UK, including over half of the Am Law 100.

DiPietro spoke for over an hour about trends in law firm profitability. The dominant theme was that 1998 to 2007 was a golden age of profitability, marked by strong growth in demand for legal services, double-digit revenue growth and client tolerance for steady rate increases. Associate attorneys were hired at a rate that corresponded to the strong growth in demand, productivity was relatively steady, and the largest law firms outperformed the industry.

The 1998-2007 period was also a great time for legal employment. Nationwide statistics for the class of 2007 marked a 20-year high for entry-level legal employment rates.

Fissures in this law firm profitability model began to appear even before the recession hit. Over the last two recessionary years, DiPietro described six factors that combined to place enormous stress on the profitability of private law firms.

  • Client consolidation: Consider the financial services industry. Because of mergers and failing businesses, there are fewer clients doling out business to law firms.
  • Convergence and casting a wider net: For example, GE recently cut the number of law firms it employs from 400 to 200, and then again to 112. Large clients are actively seeking more attractive rate structures from their law firms.
  • Commoditizaton: Firms can become “expert” in a practice area quickly by hiring partners from other firms.
  • Heightened client demands: Clients want increased partner time but are less willing to accept high rates. This attitude has led them to cast a wider net when considering firms.
  • Intensifying price pressure: Clients are shopping for good value in all but “bet the company” cases.

These factors resulted in 2008-09 being marked by declining demand for legal services, rates increasing at a slower pace, profits per partner declining and the largest law firms underperforming the industry.

Law firms laid off partnership-track associates and dramatically reduced summer program hiring. There were 42,700 legal sector jobs lost between Dec. 1, 2008, and Dec. 1, 2009. Of the 12,000 people laid off at the 138 largest law firms, 4,633 were lawyers.

DiPietro suggested that to control the ratio of lawyers to partners (leverage) in the near future, large law firms will hire fewer traditional, partnership-track associates because they will be looking to not increase the number of equity partners.

In closing, DiPietro noted that he has a daughter who just finished her first year of law school. As an applicant, she was admitted to a top 20 school with no scholarship, as well as a lower-ranked school with a 90 percent scholarship. She sought her dad’s advice about where to enroll, and DiPietro strongly encouraged her to enroll at the solid but lower-ranked law school where she could graduate with minimal debt.

It is his belief that due to uncertainty about the availability of jobs at large law firms paying six-figure salaries, it is wise for law students to get a good but affordable education that will enable them to consider the widest range of potential entry-level jobs.

Todd Rogers, Assistant Dean for Career Services