Law Firms Are More Profitable Than Ever (So Why Aren’t They Promoting More Equity Partners?)

April 27, 2022

In its annual survey of law firms, Wells Fargo’s Legal Specialty Group found that most firms reported increased revenue in 2021, with the top 50 firms reporting 16% growth on average. Yet, despite their success, law firms are not sharing ownership opportunities with the associates and non-equity lawyers who fuel their extraordinary growth: the top 100 firms increased their equity partner ranks by just 0.2%. So what’s going on?

Equity partner profitability relies on leverage, i.e., a bottom-heavy structure that gives the equity partners a cut of the fees billed and collected by the numerous non-equity timekeepers at the firm. This makes firms “revenue sensitive,” meaning they can increase profits more easily by squeezing extra hours from non-equity lawyers, than they can by cost-cutting (or innovating). The result is that billable requirements for associates have skyrocketed from around 1,700 in the 1980s, to a staggering 2,200 at some firms today. During that time firms consistently promoted fewer and fewer equity partners. By pushing their rates and hourly requirements up, and closing the equity partner track for most lawyers, firms have been able to funnel much of that increased revenue to a smaller and smaller cadre of highly paid equity partners.

Major firms can continue reporting impressive increases in profits per equity partner (PPP), but only by limiting ownership. Since PPP numbers, and not the odds of making equity partner at a firm, are the focus of AmLaw scorekeeping and firms’ recruiting efforts, law firm prestige will continue to rely on shrinking, not growing, the equity partner ranks. As a result, retention, inclusion and diversity will continue to decline at leading firms, even as profits go up.

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