Law Firm Closures and Associate Raises Underscore Legal Market Dichotomy

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The Shift: Law Firm Closures and Associate Raises Underscore Legal Market Dichotomy

Within a span of one week, the dissolution of a longtime Am Law 200 law firm was announced, while another big firm raised associate salaries, potentially setting off a new market scale for junior attorney pay.

In the 2023 economy, there appears to be no clear direction for the bulk of law firms, unlike 2021 and 2022. Law firms are pursuing a variety of trajectories, in a tale of two markets.

Indeed, some law firms “have momentum”—a sustained period of growth or success—while others appear to be closing, shrinking or struggling just to stay on pace with the market. And some firms are changing their structures and compensation to stay competitive.

The Conversation

Citi’s nine-month survey check with law firms found an average 4.8% growth in revenue year–over-year, up from 4% through the halfway point of 2023, as expense growth seemed to cool.

Of course, these industry-wide numbers, trending in a positive direction, don’t hold true for every firm or every segment, and there’s traditionally much disparity behind the average.

One reason behind the divergence in law firm trajectory this year may be the practice mix. Large firms that are wholly dependent on M&A and capital markets work are more vulnerable. Law.com reported in September that high-yield focused-firm Cahill Gordon & Reindel, after seeing lateral partner losses and profit falls, is planning to expand in other practice areas in light of what the firm called the longest slowdown in leveraged finance that it's seen in decades.

Meanwhile, law firms with significant business in litigation and other corporate practices, such as investment funds work, are seeing growth.

“This year is really a story about practice mix,” Gretta Rusanow, head of advisory services for Citi’s law firm group, told Law.com. “So if you’re a firm who has a more balanced practice mix, and are less dependent on large-cap M&A and capital markets work, then you’re busier in the practices I’m seeing, whether it’s litigation or regulatory work. Antitrust is particularly active this year, as is bankruptcy and restructuring. If you happen to do a lot of restructuring and investment funds work, there’s been a good amount of activity in the market.”

Besides not having the right practice mix, some law firms have also struggled this year from fundamental threats to their businesses— from losing too many rainmakers, to aging lawyers and succession challenges.

Those are some of the issues behind the growing list of closing law firms in 2023, such as New York-based Stroock Stroock & Lavan; Philadelphia-based Schnader Harrison Segal & Lewis and Dolchin Slotkin & Todd; New York-based Ganfer Shore Leeds & Zauderer; and Phoenix-based Jennings, Strouss & Salmon.

The Significance

The backdrop of some of these law firm closures is the changing business approach of the legal industry. Law firms need to adapt, or they won’t keep up.

The reign of Kirkland & Ellis, with its focus on luring top laterals from competitors and its nonequity partner engine, has posed one of the largest influences on the market. Kirkland and a few others are generating revenue competitive with Fortune 500 companies.

To keep up with the competitive environment, even the old guard of elite firms has changed their approaches lately. That includes Paul, Weiss, Rifkind, Wharton & Garrison—which recently lured top private equity partners from Kirkland—considering a nonequity partner model and Cravath Swaine & Moore adopting a nonequity tier and breaking its lockstep compensation model.

As some law firms fail, some of these elite law firms are thriving by changing their structures, compensation and business strategies. As Law.com reported, a willingness for hard changes is a factor in the success of several leading law firms with momentum.

The Information

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The Forecast

Law firms will probably fare better this year compared with 2022. Citi’s Rusanow says she currently expects “mid-single digit revenue growth and modest profit growth” for the year overall, although a big question mark remains over how firms fare on end-of-year collections.

These averages, however, obscure some of the highs and lows in the market. There is still lingering uncertainty over when M&A and capital markets work, including IPOs, will come back to a significant volume. As a result, stealth layoffs, firms cutting back on hiring and less appetite for discretionary spending continue to spread in the industry.

As law firms like Milbank can afford to expend $10,000 more per associate on salaries, others are hurting.

“I’ve been surprised by how many firms say they’re having a terrific year because we are not having a terrific year,” said the leader of a firm in the Am Law Second 50. “In the transactional market and M&A market, there are big deals being done, but the total volume of deals being done isn’t as great. Big deals are being done by those big firms so they’re fine. But since the total number of deals getting done is less, it hurts firms like ours.”

While the full 2023 financial results of the Am Law 200 may not be solidified for months, reports of the legal market dichotomy are now present.

Christine Simmons is a senior editor for business of law news. Contact her at csimmons@alm.com. On Twitter: @chlsimmons