All of that is well and good, but at the end of the day one giant burning question remains: Are our Focused Firms more profitable?

The Top Line

Beginning with the top line, revenue represents an interesting conundrum. As we previously showed, more than half of our Focused Firms group consisted of midsize firms, or firms outside of the Am Law 200. This is readily apparent when comparing average total revenue between the two groups: The average Focused Firm took home $283,640,307 dollars in 2019, while the average among firms outside of that group was significantly greater at $394,409,198. This a more than $100 million-dollar revenue gap that was entirely attributable to firm sample, with the group of non-focused firms consisting of a much higher proportion of firms in the Am Law 100 and Am Law Second Hundred as compared to our Focused Firms group.

Despite the smaller average total revenue, revenue growth tells a different tale and is much more in line with what was reflected in our demand figures. Average revenue growth in our Focused Firm group did outpace all other firms, 5.0% to 4.7% respectively. Further, on a per-lawyer basis, once again our Focused Firms reigned supreme. Average revenue per lawyer was more than $100,000 greater among Focused Firms, at $880,826, than across all other firms, with $767,211.

Considering all of this and despite their smaller size on average, when looking at the top line it is abundantly clear that firms with more of a singular focus are increasing their revenue at a greater pace and doing so more efficiently on a per lawyer basis when compared to the rest of the market. At this point, the Focused Firms find themselves halfway to pay dirt; however, there are still expenditures to consider.

The Middle

Just because a firm is bringing in more revenue on average does not always necessarily mean all that revenue is making its way to the pockets of partners or shareholders. The modern law firm now more than ever is faced with difficult questions on which areas of expenditure are most important to increasing operational efficiency, profitability, and thereby sustainability. This is quite evident when examining increases in both direct expenses, or fee earner compensation, as well as overhead expenses. In fact, both direct and overhead expenses at our Focused Firms are outpacing their less-focused colleagues.

In an interesting takeaway, direct expense growth 鈥� more associated as of late with Am Law firms and Associate raises 鈥� are higher among our Focused Firms that fall outside of the Am Law 200. This is not new development, with Focused Firms鈥� rolling-12-month growth percentage surpassing all other firms since the fourth quarter of 2018. This is could be attributed to the need for hyper-specialized lawyers with expertise in more niche areas commanding higher salary. Direct expenses increased in 2019 by 4.4% on average among Focused Firms, almost a whole percentage point more than across all other firms.

In the case of overhead expenses, Focused Firms have been outpacing their counterparts for more than a calendar year in terms of rolling-12-month growth averages. In fact, overhead growth has only dipped below 5.0% once, and only bottomed out at 4.9%, in the last year among Focused Firms. In contrast, our non-focused firms have only recently surpassed the 4.0% average growth mark, reaching 4.2% growth on average in the fourth quarter. Focused Firms also are notably increasing their recruiting and technology expenses at faster rates than the non-focused group. Further, as a result of the increased levels of growth, occupancy expenses 鈥� which constitute 26% of a firm鈥檚 overhead expenses on average 鈥� increased by 6.7% in 2019 in the Focused Firms group, 5.5% greater than the rate among the non-focused firms.

The Bottom Line

In the end, despite the increased levels of expenditure and smaller overall revenue numbers, Focused Firms are on average better able to convert their revenue to take home pay for their equity partners. Profit per equity partner was 24.6%, or $222,723 dollars, higher in our Focused Firm group compared to all other firms.

Based on the data from 2019, it appears that clients prefer to work with firms that present themselves as foremost experts and strongly focused in a particular field. It also is apparent that firms with a singular focus benefit from smoother operational efficiency, starting with the productivity levels of their lawyers and moving all the way down to increased amounts of revenue per lawyer and profits per equity partner.

Considering recent world events, it鈥檚 clear that now it pays to trim the excess and focus on fewer practice areas that your firm and your lawyers know best instead of trying to be the best in every possible area.

Check out the series of blog posts here.

Still, it looks like overall, some headways into efficiency have been made. The large law firm market, after many years of relatively flat demand following the Great Recession, has found some footing, with 2018 and 2019 providing back-to-back years of 1.0% demand growth. Not only have law firms found more work, but they are more aggressively charging more for such work with an average worked rate growth approaching 4% in 2019.

In our , we introduced our Focused Firms. These firms, due to proficiency in a practice area or efficiency in its legal delivery in that particular area, have at least 50% of their total hours worked consolidated into a single practice. Of the 156 firms included in our 2019 year-end extract, 35 firms meet our Focused Firms qualification. [More information on Focused Firms鈥� general demographic information, including how they measure up in key performance indicators (KPIs), can be found in .]

Now, the name we have given these special firms is Focused, which implies efficiency. And if we want to start down the rabbit hole of finding where this focus really lies, looking at the average amount of billable hours a lawyer charges monthly is a good place to start.

For the last three full years, our Focused Firms have consistently outperformed our Non-Focused firms. In 2019, the difference between the two groups is four billable hours per month, which doesn鈥檛 seem like much. Over the course of a year, however, that equals 48 hours, more than a full work week of extra revenue per lawyer in their respective firm.

In 2019, our Focused Firms on average had 312 lawyers and charged a billed rate of $496 per work hour. This means, that seemingly paltry four billable hours per month advantage actually leads to an additional $7.4 million in annual revenue for these Focused Firms just by relative efficiency. Is this because of the firms鈥� narrowed focused into an individual practice? Or is there something else at work here?

More than half (18 of 35) of our Focused Firms, have Litigation as their area of emphasis. So, it only makes logical sense to see how these Litigation-Focused Firms compared in terms of productivity in the litigation field to other firms in the practice in 2019.

Even though our Focused Firms outperformed our non-focused group, the difference is less than half an hour 鈥� a much smaller gap than our market-wide look at productivity. While this appears to run counter to our efficiency narrative, digging another layer deeper shows a more nuanced answer.

Looking at the type of lawyer that is performing these hours vastly changes the perceived value brought to the firm. In 2019, Our Litigation-Focused Firms had Associates that were much less productive than our non-focused litigators, to the tune of around six less billable hours per lawyer per month.

By contrast, the Equity Partners in the Litigation-Focused Firms provided seven more billable hours per lawyer per month compared to the Equity Partners in those firms鈥� without a focused approach to litigation. The average Equity Partner charges a billed rate of $617, while Associates are billing at a $361 per hour clip.

The efficiency that truly comes from these Focused Firms鈥� practice area is the highly talented and productive Equity Partners who steer their firm鈥檚 specific area of expertise.

Check out the series of blog posts here.

And while it is true that as a result of a significant wave of hiring, revenue and profitability metrics have both continued to rise. However, law firms are faced with ever increasing levels of competition from new entrants into the market, often referred to as Alternative Legal Service Providers (ALSPs). There are a number of different strategies firms have pursued in an effort to secure their foothold on the market, and one result has been record-highs in law firm mergers and acquisitions. Other firms have consolidated their focus, homing in on one or just a few practices that they believe give them a competitive advantage over others.

Whether that is due to expertise in that practice or efficiency in its legal delivery in that particular area, it is now more common than ever for a firm in the Peer Monitor program to have at least 50% of their total hours worked consolidated to a single practice.

Over the next few weeks, we will take a closer look at these Focused Firms, their performance over the past year, and whether their singular focus has translated to increased levels of success in an ever more competitive law firm market.

Of the 156 firms included in our 2019 year-end extract, 35 of them can be classified as Focused Firms. They existed within each of the three main segments the program is broken into, but they were not evenly distributed throughout. Almost half of our Focused Firm population is classified as a midsize law firm, meaning they reside outside of the Am Law 200.

The areas of focus varied as well.聽While firms that had more than 50% of their work classified as Litigation made up the largest proportion of a particular area of focus 鈥� with 54% of our Focused Firms having Litigation as their primary practice 鈥� there were seven practices in total that聽at least one firm fell into. Further, 17% of the Focused Firms main practice area was Labor/Employment, and an additional 14% of Focused Firms鈥� primary practice falls into the greater Transactional Practices bucket, with 8% for Corporate General and an additional 6% for Real Estate.

While the firm segmentation and area of focus varied, what is more evident at first glance is the performance advantage our Focused Firms enjoyed in 2019. Focused Firms averaged 2.9% demand growth for the year, significantly outpacing the 0.8% growth from our All Other Firms grouping, which is composed of all law firms minus our Focused Firms group. While average worked rate growth was lower among our Focused Firms group, the average fees worked outpaced all other firms as result of that aforementioned significant demand growth. Finally, despite lawyer growth of 2.6% on average, the productivity declines were actually less among our Focused Firms group, again owing in large part to increased demand in the group.

Over the next few weeks, we will further examine our Focused Firms group performance, and highlight areas in which they surpass or fall short of their colleagues that have a more diversified portfolio of legal offerings.

The entirety of the story is yet untold, however, it initially appears that those law firms with more singularity of focus are more able to continue to attract new business, increase their total dollar value of fees worked, and do so more efficiently than all other law firms.

Check out the series of blog posts here.