The Big Law arms race for top attorneys has been a defining feature of the legal industry lately. But many law firm leaders still aren’t totally sure how to reconcile the rising cost of talent with the need to stay profitable.
As a result, analysts say, the cost of legal services could continue rising; there could be a slowdown in hiring or even a loss of talent at firms geared toward the middle market; and both trends could exacerbate an already-growing compensation gap between the most profitable firms at the top of the Am Law 200 and everyone else on the list.
The pay gap in some instances is starting to become too much for even the most creative or cultured firms, said Kristin Stark, a consultant at Fairfax Associates. “The things that used to keep people at those firms—the culture, the history—it’s hard for those to be as meaningful when the dollar gap is so big,” she said.
About 80% of firm leaders said they were either “neutral” or disagreed in some fashion with the statement that they had “a good strategy” to address rising salaries so that profits won’t be affected, according to survey results released this week. The authors of the report, the 2022 Law Firm Profitability Survey, wrote that this is “a major red flag.”
“The salary wars will continue or even escalate, and firms that are not proactive in addressing salary issues could be facing a significant loss of talent,” wrote analysts at LawVision and Iridium Technology, now part of legaltech company BigHand.
Despite the rising cost of talent, those same leaders in the survey overwhelmingly said they were satisfied with their profits over the last three years. A majority of the respondents—representing 74 firms in jurisdictions around the globe—have also been increasing their ability to do contribution analysis, the granular calculation and forecasting of things like practices, offices and clients that paint a nuanced picture of how firms make money and help them become more efficient at it, the survey found.
That at least suggests the so-called “salary wars” haven’t been fatal, and that firms are still working on ways to improve profitability in multiple domains.
But the lack of a clear path on talent costs also underpins one of the survey’s other major findings: that firms are falling back to basics rather than trying to be transformative.
“There seems to be a little bit more of a loss for any kind of consistent response,” said Mark Medice, a principal at LawVision and one of the authors of the report. “They seemed to say, ‘we don’t really have a strategy. We’re working from the playbook we’ve had success with in prior years.’”
That doesn’t mean every firm is affected the same. Not being proactive could mean continuing to match the market and pay up in perpetuity. At least a handful of firms can do that without blinking, while others might get roped in to paying more than they can afford.
It also might mean the search is ongoing for creative ways to keep talent without having the highest compensation scales. Either way, not having a concrete plan to handle escalating salaries could mean more costs get passed on to clients, Medice said, and in general, more economic stress for firms.
“The reason it caused us concern—if they said they didn’t have a strategy, they’re out of balance. They either paid too much, or they’re losing people, and things are sort of in flux,” he said, adding, “Obviously, if you can’t keep talent or you pay talent beyond your means, that will have a significant effect on your profitability.”
While the lateral market has cooled a bit from 2021, recruiters say, it’s still extremely competitive relative to the last two decades. And even as the U.S. economy has officially contracted for the second straight quarter, the legal industry is broadly expected to remain busy on the talent acquisition front this year.
In contrast with the largest five or 10 firms in the world, some firms in the Am Law 200 that are focused more on the middle market may have to pump the brakes on lateral hiring this year, said Scott Yaccarino, recruiter and co-founder of New York-based Empire Search Partners.
Those firms that do have strategies to continue competing for talent—or who just have enough cash—will increase segmentation in the market.
“That delta between those top X firms and the rest of the market is only going to grow, and as that happens, I think those firms that are very savvy, I think those firms will be in an even better position to go out and cherry-pick top partner level talent from firms that are further down in the pecking order,” Yaccarino said.
“And I think that every managing partner in the market is well aware of this, and if they’re not, then they’re in trouble,” he added.
Stark, of Fairfax, pointed to a trend of large-group moves as one example of how the chasm between large firms and the midmarket, small and regional firms is accelerating.
“I think we’ll get to see that segmentation pressure escalated in 2022, where there’s just a bigger gap between the midmarket firms and the small to midsize range, versus truly national firms,” she said. “That’s been occurring for 20 years, but the pace is escalating in 2022.”