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 ³ÉÈËVRÊÓƵ Institute’s quarterly LFFI reports here.

This surge, excluding the exceptional second quarter of 2021 when growth was being compared against pandemic-induced lows, marks the fastest pace of growth in fees worked since we’ve been compiling this data. Essentially, this makes Q2 2024 the fastest growing organic fees worked total since the Global Financial Crisis of 2007-‘08.

Indeed, this uptick in fees worked substantially contributed to an 8.8% growth in profits per equity partner (PPEP) on a rolling 12-month basis, placing firms in an enviable position through the first half of this year.

Diversification safeguards against volatility

One of the most striking aspects of this past quarter’s performance is the diversification of fees worked growth across various practice areas. The chart below shows the impact on overall fees by each practice grouping, with weighted growth shown by the proportion that each practice group comprises of total fees. Unlike the previous revenue boom of 2021-‘22, in which growth was predominantly driven by transactional work, the current landscape showcases a more balanced growth pattern.

The average firm in Q2 2024 witnessed nearly equal growth in fees across transactional, counter-cyclical, and other practice areas such as regulatory, trusts & estates, and environmental law. Specifically, transactional work contributed 3.2 percentage points of the total 9.2% growth, counter-cyclical practices added 2.8 points, and other areas accounted for 2.7 points. This diversification places law firms in a position today in which they can potentially thrive irrespective of typical economic cycles.

As seen on the right side of the chart, firms in the Am Law 51-100 and Am Law Second Hundred segments are prime examples of how fees worked growth in Q2 has come from a diversified practice mix, enhancing firms’ resilience to market fluctuations. Should there be a decline in either transactional demand or counter-cyclical work, as has happened in the past, many firms will be well positioned to sustain their performance due to their balanced portfolio of revenue streams.

That said, of course, there are notable exceptions within specific segments of firms. Midsize firms, for example, are experiencing the majority of their demand and fees worked growth from counter-cyclical practices, particularly litigation. This heavy reliance on a single practice area could pose risks if demand shifts. Additionally, firms within the Am Law 50 are exhibiting another focused strategy, relying heavily on transactional practices which made up 45% (4.1 percentage points of their overall 9.2% growth) of their total fees growth in the second quarter.

While this more leveraged strategy may yield multiplied success during favorable market conditions, it also poses significant risks during downturns. If anything happens to transactional fees, the Am Law 50 firms are going to lose their key source of growth and could see their PPEP growth lose its positive trajectory. Similarly, those Midsize law firms heavily reliant on counter-cyclical practices like litigation could face substantial challenges if demand in these areas wanes.

Enjoying a more stable position

Overall, however, the average law firm is currently in a more stable financial position from a revenue and expense perspective as well, when compared to the same 2021 short-lived period of prosperity in 2021-‘22. Through the second quarter of this year, firms have managed to control their expenses more effectively than during the previous revenue surge, and by doing so, they have thus far avoided carrying the potential burden of rapidly escalating costs should the pace of top-line revenue slow.

It appears that firms have learned from past experiences, particularly since the transactional boom, and have adopted more prudent expense management practices both in aggregate and on a per-lawyer basis. While firms are only increasing their PPEP by 8.8% compared to the 11.5% figures seen during the transactional boom, firms are not having to pay nearly as much for that growth either. Total expenses are increasing by 5.0% and per lawyer costs are increasing by 2.9%; while these figures can be improved on, they are far lower than what was seen during the transactional boom when both aggregate and per lawyer expenses were growing at nearly double digits.

Should revenue begin to slide, firms will not be left paying the exorbitant bill they were left with last time.

In conclusion, the second quarter of 2024 has showcased a balanced and strategic approach to both revenue generation and expense management among all strata of law firms. The impressive 9.2% growth in fees worked highlights the sector’s adaptability and multifaceted growth across various practice areas, ensuring that firms can navigate different economic conditions and an uncertain future. This prudent approach is mirrored in the careful control of expenses, which are significantly lower than during the previous boom.

The varying strategies of different firm segments — such as the Am Law 50’s focus on transactional work and Midsize firms’ reliance on counter-cyclical practices — underscore the diverse paths to success. However, it may also demonstrate a strategic leaning in on strengths that can suggest some acceptance of greater volatility in performance.

More broadly, the average firm’s skill in maintaining a balanced approach will be crucial in its ability to capitalize on future opportunities and mitigate potential challenges, thus ensuring continued growth and resilience in an ever-evolving legal market landscape.

You can download a full copy of the ³ÉÈËVRÊÓƵ® Institute Q2 Law Firm Financial Index report here.