Welcome to the Center for Career Strategy and Advancement's Market Trends webpage! Our goal is to provide our assessment of, as well as third party information regarding, overall hiring trends in the legal marketplace.
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At the beginning of 2012, the market for legal service is relatively stable and slowly defining its post-recession identity. Demand for legal services is similar to that of one year ago. Early 2011 was a period of slow growth, but demand gradually deceased throughout the year, finishing the year up only 1%. Quarterly fluctuations suggest that litigation remains in a growth mode, whereas transactional practices are subject to market volatility. In 2011, we saw both historic lows for realized rates and a widening gap between rate growth across firms.
Legal hiring increased in 2011, an improvement over the last two years, though opportunities remain well below pre-economic downturn levels. Hiring appears to be taking a top-down approach, with lateral partners and experienced laterals a higher priority than entry-level hires. Private sector hiring is more robust than public sector and the salary disparity between the sectors remains. Within the private sector, the gap has grown between the salaries at the highest paying firms and the remainder of the legal market.
Law firms face a number of challenges in 2012. One of the biggest challenges may be containing increasing expenses. As headcount rises, due to onboarding of deferred associates and overall increased hiring, overhead and other expenses are growing at a rate higher than demand, leading to decreased productivity and profitability. Concerns about work in the pipeline, particularly transactional work, create additional challenges. Adjusting leverage by utilizing contract and non-partnership track attorneys can help reduce overhead but may also negatively impact productivity. Maintaining positive growth in the number of diverse attorneys will also require attention.
After a strong start, demand for legal services declined as 2011 progressed. The Hildebrandt Institute's Peer Monitor Index reported that during Q4 2011 demand for legal services declined by 1.1%, continuing a downward quarterly trend throughout 2011. Citi's 2011 Third Quarter Report confirmed declining demand growth, with a 0.3% decrease during the third quarter. The strongest growth in demand was for the firms in the second one hundred firms in the AmLaw 200 (up 1.9%); AmLaw 100 law firms increased by 0.6%. Demand for midsized firms decreased by 1.1%.
Demand for legal services varied across the nation. Los Angeles saw the greatest growth, with Q4 2011 demand increasing by 3%. Most other major U.S. markets were down in Q4 2011, including Chicago (-1%), New York (-4%) and Washington, DC (-2%). Silicon Valley stood out as a positive, rising 10% during the quarter. Internationally, London saw 4% growth in Q4 2011.
As the business and legal industries continue to recover from the economic downturn, practice area strength continues to fluctuate in reaction to market shifts. The Q4 Peer Monitor Index indicates that demand for litigation services was up 1.1% for the quarter and 2.4% for 2011. IP litigation remained strong, 5% for the quarter and 6.2% for 2011. Transactional work slowed down as a whole, with declines in general corporate (Q4: -4.7%, 2011: -0.5%), M&A (Q4: -5.1%, 2011: -1.2%), and capital markets (Q4: -5%, 2011: -0.5%) work. Of the AmLaw 200 firm leaders responding to an American Lawyer survey, 65% thought transactional work would remain flat or decrease in 2012. Bankruptcy was down over 6% for 2011, which is not a surprise given the sharp increase in such work in recent years.
According to Robert Denney & Associates' legal industry overview, a number of practice areas enter 2012 quite strong, including banking, health care, energy, IP, white collar, regulatory, commercial litigation, and labor and employment. Real estate is picking up while financial services will likely cool throughout the year.
The market for attorneys has slowed in reaction to the economy, impacting entry-level and lateral hiring. However, the Peer Monitor Index reports that headcount grew in by 1.4% in 2011; headcount declined through most of 2009 and 2010. Related, in 2011 new hires exceeded departures, largely related to the onboarding of deferred associates, as well as increased hiring and replenishment in preparation for anticipated demand growth.
Picking up where we left off in 2010, large-scale attorney and staff reductions were low in 2011, reversing the trend seen in 2009 and early 2010. Small-scale layoffs remain part of the new economy and have occurred in firms on almost every substantial legal market.
Seasonally adjusted U.S. Department of Labor statistics reveal that approximately 1,000 legal sector jobs were lost in Q4 2011. The legal sector shed approximately 2,500 legal sector jobs in 2011 and approximately 2,700 legal sector jobs between December 2010 and December 2011. (Note: "Legal sector jobs" includes attorneys, paralegals, and other non-lawyer support workers.)
According to the National Law Journal, the combined 2009 and 2010 total headcount decline at NLJ 250 law firms was almost 10,000 attorneys; the bulk of the decline occurred in 2009. While recent post-economic downturn years saw the dissolution of several large law firms, in 2011, law firm closures were confined to small firms. If recent layoffs are a reliable indicator of things to come, future layoffs will most likely primarily impact staff and non-equity partners. A recent survey of law firm leaders reveals that what was once taboo – de-equitizing partners – is now an accepted aspect of the new economy. Roughly 39% of respondents stated that they had de-equitized at least one partner in 2011 and 38% expect to do so in 2012.
Internationally, layoffs have tended to track the U.S. market, with a significant slowdown in terminations in 2011. Concerns about the Eurozone economy cause some level of instability in the European employment market. Research conducted by Smith & Williamson indicates that almost half of the UK's top 30 firms are considering or committed to de-equitizing partners. Such a move would help counter shrinking profit shares.
Lawshucks.com's Layoff Tracker provides an updated list of law firm layoffs.
Lateral hiring was up in 2011. For October 1, 2010 and September 30, 3011, there was a 22% increase in AmLaw 100 and 200 lateral partner movement compared to the same timeframe one year prior. According to NALP, there was a 48% increase in lateral hiring across all firms in 2011; a 20% increase in partner hiring and a 63% increase for associates. This increased movement created a competitive market for talent. According to a Robert Half Legal survey, 49% of respondents reported that it has been difficult for their firm or company to find experienced attorneys. While the past two years saw partners moving from larger firms to smaller firms, the trend seems to have reversed. A review of partner movement in AmLaw 200 firms showed significant movement from firms in the second 100 to those higher on the list. Aric Press of the American Lawyer commented that “the superrich have converted the merely rich into farm teams.” An American Lawyer survey of law firm leaders found that 74% of respondents expect to hire lateral partners in 2012. According to the Citi Third Quarter Report, across almost all sectors of the industry, equity partner headcount has flattened and/or decreased. Rather than promoting, the trend has been to bring in laterals at the partnership level. On the international front, a Legal Week survey found that lateral hiring in London was up 41%.
Entry-Level and Summer Associate Hiring
Only two years after Fall 2009's 50-75% decrease in summer classes, initial indications are that the number of employers recruiting on campus and the number of summer job offers extended to students grew in Fall 2011. Related, NALP reports an 87.4% offer rate at the end of 2011 summer programs, up significantly from the 69% rate at the end of 2010 summer programs. For comparative purposes, the offer rate was 92.8% for 2008 summer programs. Current entry-level hiring is still well below pre-downturn levels. Growth is cautious, with firms paying greater attention to class size and practice area needs. Related, Fall 2011 recruiting saw a higher level of attention and scrutiny in the interviewing process, with more firms introducing behavioral questions and panel interviews to the process.
NALP research reveals that up to 3,700 Class of 2009 graduates had a start date deferred by three to fifteen months. Approximately 60% of AmLaw 200 firms deferred start dates for the Class of 2009. Deferrals decreased significantly for the Class of 2010, typically for a shorter duration. This trend continued for the Class of 2011, with formal deferrals quite rare, but with start dates as far out as January 2012 now the new normal.
Regional firms primarily focus their summer recruiting efforts to schools within their geographic region, if they are recruiting anywhere at all. Robert Denny & Associates reports that with entry-level hiring at the largest firms below pre-downturn levels, new entry-level opportunities have now opened up at mid-sized firms.
New Staffing Models
The traditional law firm model is evolving. A growing number of law firms hire attorneys for non-partnership track positions and have increased their use of temporary/contract attorneys. A California Lawyer survey of the state's 50 largest firms found that eight offer non-partnership track positions. Nationwide, firms such as McDermott Will & Emery and WilmerHale have increased the number of non-partner track attorneys in their ranks.
Outsourcing provides another law firm staffing and leverage option. An American Lawyer survey of AmLaw 200 firm leaders found that 37% of their firms outsourced work to third parties. Outsourcing legal work overseas to legal processing centers (LPOs) is nothing new, but in 2011, LPOs increased their domestic presence. Pangea3, an Indian LPO, opened a Dallas office capable of accommodating 400 employees, allowing for the provision of low-cost services in a conveniently located domestic location. Integreon, an LPO with offices around the world opened an office in Fargo, North Dakota with plans of employing up to 600 U.S. employees. UnitedLex has employees in Kansas and India, with plans to grow its U.S.-based operations.
The move to institute apprenticeship programs has slowed. The programs vary from firm-to-firm, but the general concept involves hiring recent graduates at a reduced salary for a set period of time (ranging from six months to two years), during which they take classes, shadow firm attorneys, and handle pro bono matters. In so doing, practical legal skills are built with little time billed to clients. Ford & Harrison was a leader in instituting such a system, and they have since been joined by others, including Drinker Biddle & Reath, Frost Brown & Todd, Strasburger & Price, Gibbons, and Neal Gerber & Eisenberg.
In recent years, entry-level salaries at the nation's largest law firms have fluctuated. Salaries are now, with some exceptions, at pre-downturn levels. However, due to decreased entry-level law firm opportunities, new attorneys today make on average less than they did last year. A NALP study revealed that the mean entry-level salary for all new Class of 2010 attorneys was $84,111 (down almost 10% when compared to the Class of 2009). There continues to be a bimodal distribution of salaries, with 18% of reported salaries at $160,000 and 48% in the $40,000 - 65,000 range. The median salary for first year attorneys in private practice was $115,000, though the median entry-level salary for attorneys at firms of 100 attorneys or less fell below the overall median. The median entry-level salary for attorneys at firms of 25 attorneys or less was $73,000, compared with $160,000 for first year associates at firms of 701 or more attorneys.
Entry-level salaries at the largest firms in Chicago, Los Angeles, New York and Washington, DC are $160,000, with Boston and San Francisco at $145,000. Starting salaries at the largest firms in smaller markets tend to be in the $90,000 – 130,000 range. The salaries at the largest firms have put financial pressure on mid-sized firms.
A large disparity still exists between public sector and private sector salaries. For the Class of 2012, the median entry-level attorney salary for government agencies was $52,000 and the median public interest entry-level salary was $42,900.
After several years of reduced or eliminated bonuses, frozen or cut associates salaries, associate compensation is on the rise. The average salary of a mid-level associate at an AmLaw firm is $178,164, up 4% from last year and the highest it has been in five years. Similarly, bonuses are back and the largest firms compete to pay top dollar.
Following a challenging 2009 and 2010, it was predicted that 2011 would be a year of recovery. Instead, most firms found that while 2011 began strong, profitability waned and expenses increased as the year progressed.
In light of financial stresses, firms took numerous measures in 2009 and 2010 to decrease expenses, including delaying technology upgrades and reducing headcount. In 2011, delayed expenditures, upgrades, and investments in human capital had to be addressed. According to the Peer Monitor Index, expenses increased in 2011; direct expenses were up 5.2% and overhead expenses increased by 3.4%. A Citi year-end survey found increased expenses of 4.4%. Containing rising expenses, especially in light of signs of slowdowns in demand and productivity, may become a challenge for firms in 2012.
Of particular note is post-economic downturn changes in law firm leverage. In 2001, 85% of non-equity partner lawyers in law firms were associates; that number fell to 73% in 2011. With income partners now accounting for a greater percentage of firm lawyers, compensation costs have gone up. Related, income partners on average account for approximately 150 fewer billable hours each year than equity partners and associates, meaning that as leverage has shifted within firms, productivity and revenues have declined.
One way to contain expenses is to move certain employees to off-site centers in cheaper locations. Orrick, Herrington & Sutcliffe was an early adopter of this approach, opening a now over 1,200 employee operations center in Wheeling, West Virginia over ten years ago. The operations center houses non-partner track associates, support staff and employees performing non-legal functions. Recently, Pillsbury Winthrop Shaw Pittman announced that they will open an office in Nashville to house up to 150 employees performing a range of non-legal services. It is probable that in 2012 we will see the creation of new off-site centers and the “hoteling” of practice groups.
Rates and Revenue
The billable hour is not dead yet, nor will it be any time soon. However, in the face of client demands for cost containment and increased efficiency, firms are showing more openness to considering fixed fees, contingency fees, and other alternative billing arrangements, typically on a matter-by-matter basis. An American Lawyer survey of law firm leaders found that 81% of those responding have more clients asking for discounts and 92% used flat fees for at least one deal in 2011. In the same survey, 73% felt that the reason we have not seen more alternative fee arrangements was that clients and firms lack experience with such arrangements (88% felt this way one year prior). We can expect that alternative fee arrangements will become even more common in 2012. Nonetheless, the predictability of and familiarity with hourly billing suggest that law firms and clients alike will continue to primarily rely on the billable hour in most instances.
Law firm billing rates rose in 2011, but at a substantially reduced level. The Peer Monitor Index reports a 2011 increase of only 3.0%, a Citi Private Bank survey found that through three quarters, rates increased by 5%, and the National Law Journal's 2011 Law Firm Billing Survey showed an increase in billing of 4.4%. This was higher than recent years (2010: +2.7%, 2009: +2.5%), but well below historic trends of 6-8% annual increases. The Peer Monitor Index also reports that there is a disparity in the ability to increase rates. Some firms were able to successfully increase by 3-8% while others found themselves keeping rates flat or even reducing rates. An American Layer survey of law firm leaders found that fewer than 5% of respondents expect to raise rate by more than 5% in 2012.
Rates are only a portion of the equation. The Peer Monitor Index reported an all-time low for net collections (84%), ending 2011 down 1.2% for the year. Productivity was also down for 2011(0.5%); the first meaningful dip in over two years and likely tied to the fact that headcount growth exceeded demand growth. According to a Citi year-end survey, profits were up 3.3% in 2011,as were firm revenues (4.1%), most likely related to improved realization rates, a high volume of work entering into 2011, and the ability to raise rates. Of particular concern is a slowdown in the growth of inventory. In Q3 2011, the year-to-date growth rate dropped from 6.3% to 3.6%, the most significant Q3 drop since 2008. An additional complication is that according to an American Lawyer survey of law firm leaders, 43% of respondents stated that clients are taking longer to pay. On a positive note, last year profits per partner rose by 8.4% at AmLaw 100 firms and by 3.4% at AmLaw 200 firms.
Law firm mergers were up in 2011, with 60 announced or completed in 2011 as compared to 40 in 2010. With fewer large firms seeking merger partners, over 75% of mergers involved firms of 20 attorneys or less. Several mergers involved the joining of strong regional law firms, consolidating practice groups and client bases within the region. Notable mergers of larger firms include Edwards Angell Palmer & Dodge and Wildman Harrold Allen & Dixon, Kilpatrick Stockton and Townsend and Townsend and Crew, and Faegre & Benson and Baker Daniels.
As in recent years, the AmLaw Global 100 is dominated by U.S.-based firms, with three of the top five and fourteen of the top twenty headquartered in the U.S. The result of overseas expansion and establishing a global footprint is that only 28% of Global 50 attorneys practice in the firm's home country. Some law firms felt the impact of spreading too far and wide, with overhead increasing to the point that revenue per lawyer and profits per partner decreased as the firm grew.
A mid-year Legal Week survey found that the UK's 50 largest firms increased revenues by 3.6%, experiencing the market's best growth since 2008. Profits per equity partner were up 4.4%; PEP was up 8.8% the prior year, largely due to redundancies and reduced hiring, as opposed to 2011's increased profitability.
Despite downturns in Asian economies, global firms remain committed to maintaining their presence. However, other markets are making it hard for foreign firms and lawyers to do business in their countries. In 2010, the Sao Paulo Bar found that the relationships between foreign and Brazilian law firms, which allowed the foreign firms to practice in Brazil, violated local rules. Weeks later, India decided to not permit foreign lawyers to practice law in India. India is now considering allowing British firms to practice in the country. For the time being, several Magic Circle firms have referral relationships with local Indian firms. Recent changes to the UK's Solicitors Regulation Authority (SRA) may have an impact on partners in U.S. firms with London offices, subjecting them to SRA regulations and enforcement. Overall, restrictions on foreign lawyers practicing within their country create challenges for the globalization of U.S. firms.
Australia is a ripe market for mergers. The accessibility to Asia and the proximity to natural resources, particularly the Perth market, are attractive features to foreign firms. Canada has been identified as another hot market for international mergers in 2012.
Federal government lateral hiring increased slightly in 2011, but entry-level hiring, which is primarily conducted through Honors programs, continues to contract. State and local government hiring is largely frozen due to stress related to decreased tax revenues. Entry-level public interest hiring is also down. Legal Aid across the country has been hit particularly hard due to decreased IOLTA funds. The potential of drastic cuts to Legal Services Corporation funding in 2012 could further impact employment opportunities and the ability to meet the needs of the underserved.
Attorney layoffs and deferrals in 2009 and 2010 resulted in volunteerism at public interest employers and paved the way for a new norm where public interest organizations have increasingly come to rely on volunteers instead of making permanent hires. While positive for the public sector as a whole, this has resulted in fewer permanent opportunities for graduates seeking public interest careers.
National application volumes have been trending downward during the past few years. Following a small 2% increase in applications to law schools in 2010, applications declined 11% in 2011. As of this writing, 2012 applications are down 15.6% and applicants are down 16.2%.
According to The American Lawyer's 2011 Diversity Scorecard, the total percentage of ethnic minority attorneys in roughly 200 of the largest U.S. firms rose slightly in 2010 to 13.9% after falling in 2009 (2011 figures are not yet available). While attorney headcount fell in 2010, minority attorney headcount actually increased; in 2009, minority headcount decreased at a greater rate than overall headcount. It is believed that 2009's decline, the only decline in the Diversity Scorecard's ten years, was a onetime anomaly, though it is too early to affirmatively reach such a conclusion. At least one consultant has speculated that the increase may have more to do with improved recordkeeping than improved hiring patterns.
Wilson Sonsini Goodrich & Rosati again received the highest diversity score. The remaining top five law firm scores were White & Case; Munger, Tolles & Olson; Cleary Gottlieb Steen & Hamilton; and Lewis Brisbois Brisgaard & Smith.
In 2011, The Institute for Inclusion in the Legal Profession conducted its first annual review of legal profession diversity, highlighting some positive trends and several pipeline concerns. From 2000 to 2009, diversity in the legal profession increased by nearly 2% to 11.6%. Women now represent over 43% of attorneys, though they have low levels of inclusion at the partner, federal appellate judge, and law school dean levels. Related, women are less likely to enter private practice than men. African American attorneys have the highest level of minority representation (4.7%), though fewer African Americans are entering the profession today than in past years, and along with Native Americans, are also less likely to enter private practice than Asian American attorneys. The percentage of LGBT attorneys, while increasing, remains low.
Resources: ALM Media Properties, American Lawyer, Altman Weil, Bureau of Labor Statistics, California Lawyer, Citi Private Bank, HBR Consultants, Hildebrandt Institute's Peer Monitor Index, Institute for Inclusion in the Legal Profession, The Legal Intelligencer, Legal Times, Legal Week, The Minority Law Journal, National Law Journal, NALP, New York Law Journal, New York Lawyer, The New York Times, The Recorder, Robert Half Legal, and Texas Lawyer.
Last Updated: March 2012