Top-Performing Law Firms Investing in Their People and Firm Culture Amidst Ongoing Talent War, Says Thomson Reuters Report
- “Sharing the spoils” of higher profitability and building an attractive firm culture distinguish highest-performing firms
- Non-structured collaboration, technology adoption, ESG mission are key differentiators
- Paths to sustainable profits-per-equity-partner growth will be key to future success
MINNEAPOLIS-ST. PAUL, March 14, 2022 – Top-performing law firms tend to pair aggressive investment in talent with a strong firm culture to help achieve stronger, sustainable growth, says the 2022 Dynamic Law Firms Report from Thomson Reuters. Amidst record profitability last year and a growing war for talent, the highest-growth firms are enjoying the results of long-term strategies to reap growing profits and lower talent turnover.
The report, the latest in a series stretching back to 2016, identifies factors that distinguish top-performing firms from those that are challenged to keep up with the rest of the market. Dynamic firms are those that were in the top quartile of firm growth prior to the pandemic, while Static firms were those in the bottom quartile. The report examines how these two groups have performed over the past two years.
Dynamic firms had average demand growth of 2.5% over the past two years, significantly outperforming Static firms, which saw demand decline 1.8%, on average. Dynamic firms also had higher rate growth (5.2% vs. 4.3%), better productivity, stronger lawyer growth, and profit-per-equity-partner (PPEP) that were, on average, $580,000 higher. In addition, the report cited several “unresolved weaknesses” that could place Static firms in danger of falling even further behind.
Dynamic firms tend to have a higher proportion of transactional work, such as M&A and other corporate practices, which have been surging recently. Static firms, on the other hand, have a higher proportion of litigation and other practices that still have not returned to pre-pandemic levels. Despite that, the report warns that when transactional activity inevitably wanes, Dynamic firms – with their more loyal and productive lawyers, better market positioning, and more engaging cultures – are better prepared to withstand such market shifts.
Money Matters But So Does Firm Culture
In the ongoing battle for talent, Dynamic firms are having greater success at both the junior and partner levels, positioning themselves as the most appealing destination for talent. Among associates, Dynamic firms had turnover consistent with the rest of the market, while Static firms had significantly higher levels of turnover. Dynamic firms sharply increased lawyer compensation last year, especially for associates, whose compensation jumped 13.5%. Dynamic firms now pay their average associate 18.3% more than Static firms. The report likened it to a pirate ship sharing the profitability spoils amongst the crew and “throwing vast quantities of jewels at their junior lawyers.”
It’s not only new associates who are benefitting. Dynamic firms are expanding their equity partner ranks at a significantly faster rate than the industry average, as well as more heavily aligning their overall compensation with firm performance. Conversely, Static firms are trimming equity partners, which boosts profit-per-equity-partner in the short-term but does not contribute to sustainable, long-term PPEP growth.
At the same time, factors beyond compensation may also play a role in the turnover advantage. Dynamic firms tend to have distinctively different cultures that embrace change, and their lawyers rate the firms highly for collaboration and for having strong environmental, social and corporate governance (ESG) initiatives. In addition, Dynamic firms are spending significantly more in areas such as recruiting and support staff, and their lawyers are far more likely to consider themselves as technology early adopters or innovators.
This combination of higher investment in people and a more collaborative, innovative culture is more likely to result in law firms where attorneys want to stay, as well as more effective client engagement.
Meanwhile, the report warns that while a return to office could build loyalty and camaraderie, it might also run into resistance from lawyers’ increasing desire for more work flexibility. For Static firms, which are already experiencing higher rates of associate turnover, this move could potentially backfire and increase talent pressures.
“Top-performing firms tend to view change as a positive force and are more willing to adapt,” said Mike Abbott, vice president, Market Insights and Thought Leadership, Thomson Reuters. “With the rising costs and challenges of retaining talent, strategies like building a strong firm culture that makes lawyers feel valued, supported, and inspired with a sense of purpose beyond their day-to-day work play a key role. Such factors have not only helped the most successful firms continue to outperform their peers, but also builds a stronger foundation for future success.”
A copy of the 2022 Dynamic Law Firms Report can be downloaded at https://www.thomsonreuters.com/en-us/posts/legal/dynamic-law-firms-report-2022.
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