Law firm culture, investment in people are keys to long-term success, says new study

Why do some law firms consistently achieve high levels of growth in several key metrics, while others falter?

The 2022 Dynamic Law Firms Report is the latest iteration of the Thomson Reuters Institute’s Dynamic Law Firms series of reports that explore how some law firms have come to build market-leading growth.

This latest report, like its predecessors, identifies those firms which had the highest compound annual growth in revenue per lawyer, overall firm profits, and average firm profit margin – those firms we brand Dynamic. Then, the report dives into the firm financials as well as qualitative factors to determine what sets these firms apart.

But this year’s report takes a somewhat unique approach. Rather than redefining which firms are Dynamic based upon year-end 2021 financial results, this report follows a population of Dynamic firms originally identified at the end of 2019. The circumstances of the past two years provide a unique opportunity to examine whether the factors which led to success prior to 2020 were the right factors for their time, or if they helped to create firms with more resiliency and sustainability.

The findings of the report show that many of the steps that Dynamic law firms were taking prior to the pandemic also helped to position them for a higher level of success, even in a surging legal market.

The right investments

First, Dynamic firms have been investing more heavily in their people. Profit per equity partner (PPEP) payments have been higher and have shown strong growth at these Dynamic firms. This, of course, is an unsurprising trend given that Dynamic firms have also led the market in growth for both overall demand for services and worked rates. Higher firm profits have been parceled out not only among equity partners, but also among associates in the form of rising associate compensation. Dynamic firms are also investing more in people in the form of recruiting as well as salaries and benefits for support staff.

Another key factor as to why these firms are successful is their culture, according to lawyers within Dynamic firms. Indeed, stand-out lawyers within Dynamic firms were more likely to identify their firms as fostering collaborative cultures, embracing change, and adopting practices like alternative fee arrangements more readily than their peers. Lawyers at Dynamic firms were also more likely to self-identify as early adopters or even innovators in technology.

This combination of higher investment in people and a more engaging culture has resulted in law firms where lawyers want to stay and where market-leading growth is part of the reward.

Stand-out lawyers within Dynamic firms were more likely to identify their firms as fostering collaborative cultures, embracing change, and adopting practices like alternative fee arrangements more readily than their peers.

On the other hand, Static law firms – those firms that struggled to find growth or in some cases even saw contraction in key metrics – also experienced strong PPEP growth, but for much different reasons.

First, Static firms did not do as well in growing the overall pie for the firm. Average worked rate growth for Static firms actually trailed the overall market’s average rate growth. Static firms made up for some of this shortfall with higher-than-average realization against their rates, but this was tempered by a contraction in overall demand. And this demand decrease was driven by a higher proportion of work coming from litigation matters, which have been slow to recover post-pandemic.

Static firms were also more likely to invest in fixed assets for the firm. Growth in occupancy, technology, and knowledge management or library expenses at Static firms outpaced Dynamic firms, in some cases by wide margins. Much of this investment may be necessary attempts to “catch up” in areas where these firms have historically lagged, but the end result is that there was less of the spoils at a Static firm to share among associates and staff, leaving Static firms lagging in these areas.

While growth in PPEP payments for Static firms actually outpaced Dynamic firms, it was not enough to overcome the advantage Dynamic firms had in terms of actual dollars paid out. And much of this PPEP growth was due to an effort on the part of Static firms to reduce the number of equity partners receiving these payments, as demonstrated in the report’s analysis of replenishment statistics between the populations of firms.

It may be unlikely that any law firm falls squarely into the Dynamic or Static law firm camp on every single metric, as firms evaluate where they stand relative to the market based on their own key strategic considerations. Yet, the 2022 Dynamic Law Firms Report provides a useful roadmap for law firms, highlighting both behaviors to model and potential pitfalls to avoid.

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