Not All Big Law Leaders Will Reach the Top of Space Mountain

Welcome back to the Big Law Business column. I’m Roy Strom, and today we compare the rising cost of a Disney vacation with the struggle to keep partners at lower-profit firms. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

The Disney movies I fired up last weekend to entertain my 2-year-old daughter (while also caring for a 6-week-old baby) made me think of the pickle many law firm leaders are in.

It wasn’t that The Little Mermaid and Cinderella reminded me of managing partners. Or that Jasmine’s stroll through Agrabah’s market in Aladdin made me think of Big Law profits.

No, it was the commercials I had to sit through—the ones urging me to take my family on a trip to Disney World—that brought home the challenge many firms face in their business models.

Let me explain, starting with Disney. The company has learned that pricing theme park experiences for the growing ranks of the affluent is a better profit driver than catering to the general population. Unfortunately for many families, those prices have made a Disney park experience too expensive.

An Aug. 28 essay in the New York Times drives home the point. And a statistic from that article sticks with me: The number of American households worth $20 million or more grew more than sevenfold from 1992 to 2022—from 88,000 to 644,000.

It’s this accumulated wealth that drove Disney’s theme parks upmarket. I can’t fault the company for its strategy. Its experience division, which includes parks, provided 58% of the company’s profits through three quarters this year. That’s up from 45% in full-year 2019.

Growing Rates

What does this have to do with Big Law? Pricing is only one part of the story, but Disney’s price hikes are similar to Big Law’s billing rate increases.

The law rates have never grown faster, as I’ve written in recent years. Rates rose another 9.2% through the first half of the year, Wells Fargo & Co. has estimated.

If the firms are doing a Disney-style strategy, it seems to be working. Big Law profits have never been higher. Net income was up 14.5% in the first six months, Wells Fargo said.

Surely, some general counsels out there are bemoaning their inability to afford the legal teams of their dreams. But nobody ever argued that every general counsel in America should be able to afford a trip to Skadden’s conference room. The best lawyers were always a rare commodity, attracting a high price for their time.

The Disney problem I’m describing isn’t a regular Joe daydreaming about a Lamborghini. It’s about a person who feels pressured to buy something that was once within reach but that has now risen in price due to unseen competition with a large group of wealthier buyers.

So who is that person in Big Law feeling such pressure?

It is the leader of a smaller law firm. That leader is increasingly struggling to keep top partners amid competition with the most profitable firms.

Talent War

Most law firm leaders believe they can afford to keep their partners happy. It’s been part of their culture for years. And many of them don’t think they compete with the Kirklands or Lathams of the world.

But in fact, they often do.

Peter Zeughauser, a partner at law firm consultancy Zeughauser Group, sees an increase in high-profit firms recruiting partners from lower-profit rivals.

The trend showed up in my column last week, when Latham & Watkins hired a real estate lawyer who’d built a niche servicing data center clients while practicing at firms including Holland & Knight, Quarles & Brady, Baker McKenzie, Seyfarth Shaw and DLA Piper.

Kirkland & Ellis this year made a similar hire in the same practice from Greenberg Traurig. Kirkland’s profit per equity partner last year was 3.5 times that at Greenberg.

The higher-profit firms often view the recruits as a way to fill a hole in their service offering, Zeughauser said.

The phenomenon isn’t new, but it has become more common as wealthy law firms have become more willing to hand out big cash for lateral hires, he said.

“There is a growing number of firms whose appetites are insatiable,” Zeughauser said.

Wealthy Firms

Many firms have bottom lines that can afford such appetites. Just as the Times piece described the increase in $20 million households, there are more highly profitable law firms than ever. There were 29 law firms with profits per equity partner over $4 million last year, according to American Lawyer data. Ten years ago, there were two such firms.

The average profits per equity partner of the 100 largest firms rose 57% to $3.2 million during the past decade, according to the American Lawyer. The average PPP of the 10 most profitable firms rose 108% to $7.8 million.

It’s not that some big group of firms did poorly. It’s that the richest blew past the rest. These are the firms that reap the rewards in the market for talent. And the law firms competing with them are left to worry what partners they can afford to keep.

That brings us back to Disney. When push comes to shove, I can afford a trip to Orlando. But is it worth it? Maybe I should just go to Six Flags in Gurnee instead.

Worth Your Time

On Big Law: Law firm leaders are skeptical of the push by investors including Burford Capital to invest in law firms.

On the Big Four: KPMG is using Arizona as an entry to take its legal business national, Justin Henry reports. The accounting giant’s US law firm has spent the past six months, since gaining approval to exist in Arizona, forming co-counsel relationships with attorneys licensed in states with tighter restrictions on who can own law firms.

On Chicago: Akin is the latest Big Law firm to launch in the Windy City, taking a group of partners from Mayer Brown.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.