Every year around this time—earnings season for law firms—we’re fond of saying, “Averages mislead.” When the trade media report that, overall the entire industry had a great year, or the AmLaw 50/100/200 had a great year, or regional middle market players (fill in the blank) had a great year, our attention turns immediately to seeing if we can find any more helpful, revealing, or just-plain-interesting patterns in the data. This year is no different.
Actually, I just lied.
Of course 2020 was different, massively so, than almost any year anyone reading this has lived through. But describing (as much as possible, numerically) the unprecedented contours of how exactly it was different is what analysis is all about.
I’m looking at a spreadsheet that captures the headline-number performance (gross revenue, RPL, PPP, equity partner headcount) of the first 60 firms of the AmLaw 100 to report their 2020 results. Why 60-odd and not all 100? I wanted to get a headstart on the analysis, plus 60 is a plenty large enough sample out of 100 to see patterns, if patterns there are to discern.
Let’s look at some of the gross headline figures and then sharpen our pencils.
Gross Revenue
Good news all around.
- The median firm in my sample was up over 5% on 2020 vs 2019 (the final AmLaw reporting pegs it at 6.6%)
- 17 firms were up over 10%.
- And only 3 were down more than 5%. As Casey Stengel, manager of the expansion-team New York Mets remarked during their catastrophic first season (1962), “Can’t anybody here play this game?” In any league, there will always be a few teams having such years.
RPL
Results here were not quite as strong as gross revenue, at least numerically, but RPL is a tougher (and more telling, in our opinion) metric to move.
- The median firm was up about 4% (closer to 5% per AmLaw/final)
- Ten were up more than 10%
- And 12 posted actual declines, although eight of those were down less than 2% and only one touched nearly -10%
PPP
By and large we hate this metric; it’s game-able to the point of material misrepresentation, it’s toxic and provokes envy (offending one of the Ten Commandments and in a two-fer being one of the Seven Deadly Sins), it infuriates clients, and even if accurate it substitutes an average for an informative description of a statistical curve. Shall we go on?
But everyone everywhere is preoccupied with it, and bowing to the inevitable, we’ve learned to live with it. So here you go:
- The median firm was up over 11% (13.4 per AmLaw)
- An astonishing 37 firms (52% of the sample!) were up 10% or more.
- And a lonely six firms were actually in negative territory, although only three dropped by double digits.
Finally, for sport the two firms at the top and the bottom of our sample are two that you might have thought should be neck and neck: Davis Polk had an incredible, amazing, stupendous, Holy-Mother-Of-God year, while Shearman & Sterling’s results seem nearly as inconceivable but in the opposite direction.
- Gross revenue: Davis Polk up 22.6%, S&S down 11.1%
- RPL: Davis Polk + 21.9%, S&S -9.3%
- PPP: Davis Polk +40.7%, S&S -22.9%.
I told you it was a year like no other.
So that’s all great fun but what can we learn from a closer look?
I decided it might be informative to look at two year-on-year comparisons for the sample firms over these key metrics and see how much the change from 2019 to 2020 accounted for the total change from 2018 to 2020.
Just to clarify:
- For each of the three marquee series–gross revenue, RPL, and PPP;
- I calculated (a) the year on year percent change from 2019 to 2020 and also (b) the two-year percent change from 2018 to 2020.
- Then I looked at what portion of the total two-year change (2018/2020) was accounted for by last year (2019/2020).
What was I driving at?
All else being equal, there’s no particular reason to expect that the change in these figures over two years isn’t roughly split 50% in year one and 50% in year two. The sheer power of what an unconventional, super-outlier year 2020 turned out to be made me wonder if that was true.
Here’s how that would work:
| 19/20 as % of 18/20 | Implies….? | # of firms in sample based on Revenue |
# of firms in sample based on RPL |
# of firms in sample based on PPP |
|---|---|---|---|---|
| < 0% | One year up, one year down | 11 | 11 | 5 |
| > 0% but < 50% | Lower growth 20 vs. 19 than 19 vs. 18 | 20 | 14 | 13 |
| > 50% but < 100% | Higher growth 20 vs. 19 than 19 vs. 18 | 22 | 24 | 33 |
| > 100% | Growth from 19 to 20 more than offset decline from 18 to 19 | 6 | 11 | 10 |
Now we’re getting somewhere. A few observations:
- Fully half the firms in the sample (31/60) had one up year and one down year or less growth last year (2020) than the year before (2019) in terms of revenue.
- But only 18 firms (30%) had that experience with PPP. For over half the firms, PPP growth was stronger last year than the year before and for 10 firms 2020 was strong enough to make up for all the PPP ground lost in 2019 and then some.
Basically, the story this tells me is that firms are getting more efficient at converting revenue into RPL and RPL into PPP. (Read across that table left to right if you don’t see what I’m saying.)
Now, this is a qualitative, not a quantitative, observation, but can we offer any generalizations about firms showing very strong revenue growth last year vs. those performing less well?
I think we can. Here are all of the firms in the top 25% in terms of 2020 revenue growth:
- Cooley
- Covington
- Davis Polk
- Debevoise
- Fenwick
- Goodwin
- King & Spalding
- Kirkland
- Latham
- McDermott Will
- Milbank
- Paul Weiss
- Simpson Thacher
- Wachtell
- Weil
- White & Case
- Willkie Farr
- Wilson Sonsini
I view that list as consisting of pretty elite company.
I cannot leave you without offering a hypothesis that might explain this.
But first, I counsel you strongly against jumping to an attractive baubly shiny object explanation to the effect that “of course these firms are going to do well–that’s who they are.” We’re talking about an unimaginably extraordinary year; who’s to say that such periods don’t upend the established order? (History teaches that years like 2020 can do just that.) Plus, we’re talking about relative performance here; it’s not that these 15 firms had very strong 2020’s; it’s that they had stronger 2020’s than the vast majority of their AmLaw brethren.
Years ago a fellow I’ve blessedly lost track of asked me what I took to be (and resented as) a snarky, trick question: “What do law firms sell?” Yeah, right, and do clients hire the law firm or the lawyer? This is tiresome, thought I.
But over the years I have reflected on that question, given more prominence by the front and center debate of what clients mean when they say they want “value” from their firms.
Here’s what I think is germane for today about those 15 elite firms. One critical factor of what clients mean by “value,” which comes powerfully to the fore in times of uncertainty (2020, anyone?) is reassurance. And corporate law firm clients will pay handsomely for reassurance when it’s very hard to find. They just vividly showed us.
