In our 2014 Report on the State of the Legal Market, we noted that “there is now strong evidence that the U.S. legal market has segmented into discernible categories of highly successful and less successful firms, and that the performance gaps between those categories have been steadily widening.”

As we noted, this trend has been evident within both theAm Law 100 andAm Law Second 100 firm categories:

The top Am Law 100 firms are largely New York-centric, with market-leading practices that can command premium rates. The leading Am Law Second 100 firms are more dispersed geographically, are smaller than the average Am Law Second 100 firm (both in total numbers and in equity partners), and have intensely focused practices that command much higher rates from excellent clients. In each grouping, however, the difference in performance of these high achieving firms is so significant from others in their size category that there is every likelihood that the emerging market segments could begin to harden, forming effective barriers to entry that would make it far more difficult for other firms to move into these elite classes.

This market segmentation trend continued during 2015. In its analysis of the 2015 Am Law 100 list, The American Lawyer noted that the gap between the highest performing firms and others included in the Am Law 100 ranks has continued to widen. For example, the 25 largest U.S. firms now account for more than half of all Am Law 100 profits, more than doubling their percentage from the first Am Law 100 list published some 30 years ago. Moreover, the $5 million gap in average profits per partner reported in 2015 between the most profitable firm in the Am Law 100 and the least profitable firm is the largest in the history of the Am Law 100.

The widening gap between high performing firms and lower performing firms has also been confirmed by Citi Private Bank Law Watch. In a study of 163 law firms conducted in August 2015, Citi compared the dispersion of financial performance (as measured by various indicators of firm profitability) of firms in 2009 with their performance five years later in 2014. The analysis confirmed that performance dispersion between quartiles generally widened, particularly between the first quartile firms (as measured by profitability factors) and the second quartile firms. But the study also found that performance dispersion within each quartile increased as well.

While there are many reasons that some law firms outperform others – including historic location, practices, and client base – there is now mounting evidence that firms that have responded proactively to changing client expectations by making strategic changes to their lawyer staffing, service delivery, and pricing models are outperforming their peers in terms of financial results. In its 2015 Law Firms in Transition survey of some 320 U.S. law firms, Altman Weil found that firms that had made these strategic changes were consistently more likely to see increases in gross revenue, RPL, and PPEP than firms that had not.

More specifically, the Altman Weil Law Firm Survey found that some 77 percent of firms that made significant changes to their lawyer staffing models reported increases in their PPEP in 2014, compared to only 56 percent of the firms that had not made such changes. Similarly, some 76 percent of firms making significant changes to improve the efficiency of their legal service delivery models saw increases in their PPEP, as compared to only 61 percent not making such changes. And 75 percent of firms that made significant changes to their pricing models reported increases in PPEP, as contrasted with only 66 percent of firms that had not changed their approach. These same changes also impacted firm financial performance in terms of growth in gross revenues and in RPL, though to a somewhat lesser extent.

The findings of the Altman Weil report are supported by a smaller but more detailed survey conducted in September 2015 by Thomson Reuters Peer Monitor. That survey collected data from 34 Peer Monitor firms on specific operational changes made to respond to client expectations for more efficiency, predictability, and cost effectiveness in the delivery of legal services. Breaking the respondent firms into two categories on the basis of their overall financial performance, the data were then analyzed to determine the frequency with which upper-tier firms had pursued the various operational changes as compared to lower-tier firms within the last three years. The analysis showed that, while lower-tier firms had not implemented any changes with significantly more frequency than the upper-tier firms, the firms with better overall financial performance had outpaced the lower-tier firms in several important categories, including the following:

While neither of these studies is conclusive, both strongly suggest that firms that are proactive in pursuing new strategies to meet the concerns and expectations of their clients are more likely to achieve stronger financial results than those firms that merely react to specific client demands. That is, of course, not surprising. What is surprising is that more firms do not seriously pursue the operational changes that would make them more competitive in the current market.

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