September 15, 2008: The day everything changed. In the early hours of the morning, while most of America slept, investment bank Lehman Brothers Holdings Inc. filed for Chapter 11 protection. The U.S. economy was already reeling from the collapses, one week prior, of government-sponsored mortgage buyers Fannie Mae and Freddie Mac, which collectively owned or backed the majority of the country’s $12 trillion mortgage market. Lehman’s bankruptcy, which remains the largest in U.S. history, and the subsequent bailout of insurance giant American International Group Inc. the very next day, was enough to send the financial markets into full-blown meltdown. The impact on the country’s top law firms was profound.
For The Am Law 200, the 200 largest U.S. law firms by revenue, a decade of sustained growth came to a sudden and grinding halt. After aggregate revenues more than doubled from $41 billion to over $84 billion between 2000 and 2008, $2.4 billion was wiped from the group’s collective top lines in 2009—the first fall in overall revenue since we started tracking law firm financials in 1985. In total, 118 Am Law 200 firms saw their revenue contract in 2009 (62 in The Am Law 100, 56 in the Second Hundred).
Facing increased pressure from clients on billing rates and a dramatic reduction in demand—a recent survey by Hildebrandt Consulting and Citi Private Bank finds that demand for legal services has contracted at a compound annual growth rate (CAGR) of 0.4 percent since 2008—many firms were forced to cut costs in order to prevent their profits from plummeting.
More than $2.4 billion was trimmed from The Am Law 200′s total cost base in 2009, a fall of 4.5 percent. As a result, while total revenue for the group fell by almost 3 percent that year, net income and average profits per equity partner (PPP) levels remained broadly flat.
Much of the cost savings came in the form of painful rounds of lawyer and support staff layoffs: Am Law 200 firms collectively employed almost 950 fewer lawyers in 2009 than they had over the previous 12 months.
But despite the severity of the Great Recession, The Am Law 200 actually fared remarkably well. The $2.4 billion reduction in aggregate revenue in 2009 was recouped within the space of 12 months, with total group revenue rising $3 billion in 2010 and continuing to grow at a CAGR of 4.1 percent over the past two years. Of the 186 firms that have been present in The Am Law 200 in each of the five years since the start of the recession in 2008, 134 increased their gross revenue over that time. Of those, 122 achieved increases in net income as well. Amazingly, more than half of all Am Law 200 firms posted higher figures in each of four key metrics—revenue, net income, revenue per lawyer (RPL), and PPP—in 2012 than they did before the recession hit. To get a sense of how individual firms survived the recession, we calculated five-year CAGR growth rates for revenue per lawyer and profits per partner for the 186 firms that have consistently appeared on The Am Law 200 since 2008. To see the results of those calculations in interactive chart form, go to ” The Recession’s RPL Winners” and “Rich in Profits and Getting Richer.”
“The law is a ‘follow the money’ profession,” says Peter Zeughauser, founder of legal consulting firm Zeughauser Group. “As a general rule, when the economy is healthy, the legal industry is healthier, but law firms are, to some extent, less affected by downturns than many other industries.”