This year’s third quarter saw Am Law 100 firms increase their profit growth to record levels, but the two halves of the segment followed different strategies to get there
The third quarter of 2024 was an incredibly strong one for law firms, continuing a trend of performance improvement across all key metrics. Following an excellent first half of the year, broad-based demand growth has powered the Thomson Reuters® Institute Law Firm Financial Index (LFFI) to a score of 71 — the second-highest score ever.
A major driver of this score has been a remarkable 3.6% quarterly growth in legal demand with further gains in productivity that, in tandem, have pushed law firm revenues higher. The cost of doing business has also increased in recent months, driven both by headcount expansion and on a per lawyer cost perspective; nevertheless, firms are enjoying profit growth near record levels.
While all major law firm segments of the market are increasing their profits near 10%, when we look deeper, we can observe a stark contrast in the strategies that led to this result among the segments. Indeed, none more apparent than what is being seen with at the top of the industry in the Am Law 100.
When we look at the strategies of Am Law 100 firms, we see a bifurcation within that segment itself with the Top 50 firms following a very different path to success compared to those firms in the Top 51-100. Looking into what lies behind this can give us an indication of where law firms themselves see the market going and how they are preparing for the future.
A focus on efficiency vs. scale
As of Q3 2024, Am Law 50 and Am Law 51-100 firms are growing their profits by 11.2% and 11.0%, respectively. However, these extremely similar results hide a uniquely divergent approach towards profit generation over this past year.
One key difference is that the Am Law 51-100 firms are outperforming the Am Law 50 in demand growth. While it isn’t uncommon for the two halves of the Am Law 100 to see different levels of demand for their services year-to-year, thus far 2024 has been unique in how very disparate those levels have been. Am Law 51-100 firms have seen their demand increase by 3.2% year-to-date (YTD), while Am Law 50 firms have seen essentially flat growth.
This outperformance from Am Law 51-100 firms isn’t just being seen in counter-cyclical practices (which have been the fastest growing practice areas for all large law firms this year and in recent years), but it’s also been seen in more lucrative transactional practices. Am Law 51-100 firms have taken advantage of the demand environment by leveraging the strongest hiring season in three years and increasing their full-time equivalent (FTE) headcount with only a small hit to productivity.
This confidence in increasing headcount indicates that these firms believe they will keep seeing similar demand growth in the near future and are comfortable with increasing their operational leverage as they position themselves to gain additional legal market share.
This confidence, in fact, may be bolstered by Am Law 51-100 firms’ strategy towards having a more diverse range of large practice areas compared to the Top 50 firms, which has allowed the Am Law 51-100 to benefit more from the surprisingly strong economy in 2024.
When we compare this to the Am Law Top 50 firms, we can see that they aren’t experiencing the same demand growth levels. Yet, despite that, they are still able to grow their fees worked at above market average levels. Instead, the Top 50’s performance in fees growth has been driven by a more aggressive rate setting strategy, in which these firms have, on average, increased their rates by 9.4% YTD. Indeed, this pace of increase is easily the fastest year-over-year growth in the history of our data set.
Making this rate growth even more impressive is that this growth is coming on top of the previous all-time high annual rate growth figure of 8.3% set in 2023. Overall, this incredible rate growth has balanced out with the Top 50’s more muted demand growth to result in essentially the same level of fees growth as Am Law 51-100 firms.
A cautious hiring approach
While demand for Am Law 50 legal services is relatively low, these firms have approached hiring much more cautiously than the rest of the market, focusing primarily on adding higher-rate lawyers such as senior associates and non-equity partners. This reduced hiring volume has resulted in Top 50 firms having slower expense growth and significantly greater profit margins than their Top 51-100 counterparts.
What we are seeing is that Am Law 50 firms are emphasizing rates and cost efficiency while demand is low, while Am Law 51-100 firms are taking advantage of a robust demand environment to expand their ability for future revenue growth and profits. Two paths to the same pot of gold.
If transactional demand continues to recover, and the US legal market continues at its current strength and growth rates, we can expect all the Am Law 100 firms to benefit — even with their different strategies. Those Am Law 51-100 firms that have begun taking advantage of their current strength will reap the benefits due to having the extra capacity to manage increased demand, while Am Law 50 firms will be better positioned for higher-value work in areas such as M&A.
It is, however, worth noting that there are several factors — ranging from post-election fallout to geopolitical instability — that can cause the market to change rapidly. In that case, the relative caution we are seeing from the Am Law 50 firms may prove to have been a wiser strategy than the more leveraged approach taken by Am Law 51-100 firms.
As the legal market continues to experience its strongest performance in years, it does remains sensitive to external factors. And as law firms of all sizes prepare for these challenges, the strategic decisions they make now will be vital for their long-term success and resilience in an ever-changing environment.
You can find more about the Thomson Reuters Institute’s quarterly LFFI reports here.
