Or maybe not.
Predicting the future based on the past is a risky business. Just as age or injury might derail Rodriguez’s bid to become the all-time home run king, so do both exogenous and planned events — ranging from strategic mergers to disastrous recessions — affect the growth curves of the firms in The Am Law 100. Rodriguez has averaged 44 home runs a year for 11.8 seasons, but one cannot run a simple mathematical model (762 divided by 44) to guarantee when or if he will break the record. Nor can we know for sure exactly how rich Wachtell partners will be, or how huge a behemoth Bakers will become.
Nevertheless, the past is typically our best predictor of the future. As forecasting techniques like scenario planning suggest, we can use historic trends as a tool to gain insight about what is likely to happen. Of course, to come up with the likeliest projections, we must consider more than just historical performance. We have to scrutinise projections to identify possible factors or events that might promote or impede the forecasted values, which can then be built into the strategic-planning analysis.
Moreover, when projections from past trends are so bold that they make the future look unlikely or even impossible, we must question the underlying basis for the projections. To return to the baseball analogy, when Alex Rodriguez was on his home run tear early in the 2007 season, some analysts projected that he would shatter the single-season record. But the smarter bet was that his pace was unsustainable in light of history and would eventually slow — which it did. So, for some law firms, projections will be straightforward and speak to sustainable business models. For others, projections will be almost impossible to believe, telling us something about why those firms may struggle to meet their goals.
This analysis is based on data that goes back to The American Lawyer’s inaugural effort to document law firm finances, the 1985 Am Law 50, which identified the top revenue producers in fiscal year 1984. Forty-seven of those original 51 firms were still in existence through the 2006 Am Law 200 (which examined fiscal year 2005), providing us with financial data for a period of just more than 20 years. The projections, which also call upon headcount data from sibling publication The National Law Journal, take us out an additional 20 years, to 2025.
The forecasting model was relatively straightforward: law firms were predicted to continue to grow commensurate with their historic rate of growth. Past growth was based on the compound annual growth rate (CAGR), which is commonly used to estimate investment rates of returns, offering a ‘smoothed out’, or uniform, average growth rate through the use of a geometric (as opposed to arithmetic) mean over a specified period of time. Firms’ historic CAGRs were then projected into the future.
Some of the results — such as Latham’s projected revenue of almost $23bn (£11.8bn) in 2025 — may seem hard to swallow. But remember: large
The projections make it clear that US corporate law firms of the future will be wealthier, larger and more international than they were in the past. Of the 47 firms in the analysis, only Cahill Gordon & Reindel and Kelley Drye & Warren are projected to have gross revenues of less than $1bn (£513m) in 2025. Six firms, on the other hand, will gross more than $10bn (£5.13bn): Kirkland & Ellis; Mayer Brown; Bakers; Jones Day; Skadden; and Latham. By 2025, Latham, — at $23bn — will have dramatically outpaced Skadden, its nearest competitor at $15.9bn (£8.16bn).
The PEP projections for 2025 have Wachtell partners bringing home almost $15.7m (before adjusting for inflation). Cravath Swaine & Moore’s PEP will be $9.6m (£4.92m); Skadden’s $6m (£3.07m); and Bakers’ $2.5m (£1.28m). The highest 2025 projected PEP is at Cadwalader Wickersham & Taft, where the model suggests partners will net nearly $20m (£10.25m) apiece in 2025. But do not count on being one of those partners: based on Am Law 100 data, the firm is predicted to have only 88.
White & Case is projected to be the largest of the 47 firms in the analysis, with 13,824 lawyers; Bakers will follow closely behind with 13,512. More than three-quarters of the lawyers at both firms will be based outside the
Those 11,066 Latham lawyers will generate revenue per lawyer (RPL) of more than $2.3m (£1.18m) in 2025, but they will be outdone by the lawyers at several firms with RPL of more than $3m (£1.54m). These include Kirkland ($3.1m (£1.59m)); Cadwalader ($3.2m (£1.64m)); Cravath Davis Polk & Wardwell and Paul Weiss Rifkind, Wharton & Garrison (each at $3.6m (£1.85m)); Simpson Thacher & Bartlett ($4.2m (£2.15m)); and Sullivan & Cromwell ($5.6m (£2.9m)). Wachtell will generate a chart-busting RPL of $7m (£3.6m) in 2025.
And as the roster of firms atop the PEP and RPL projections indicates, the gap between firms will grow ever larger. The rich will continue to get richer and the poor relatively poorer. The former Am Law 50 firms with the lowest profits per partner in 2007, for example, are Fulbright & Jaworski at $775,000 (£397,500), Hunton & Williams at $750,000 (£384,700), Dorsey & Whitney at $670,000 (£343,500) and Baker & Hostetler at $555,000 (£284,500). They will trail still farther behind the pack in 2025, with Fulbright at $1.8m (£920,000); Hunton & Williams at $2.1m (£1.08m); Dorsey at $1.2m (£615,000); and Baker & Hostetler at $1.4m (£717,700). Large firms will become larger relative to smaller firms; and firms with a strong international presence will stand in greater contrast to those firms that have a minimal or no international presence.
These projections present numerous challenges and opportunities for firms in The Am Law 200. For firms to maintain the growth rates they established in the last 20 years — the rates that resulted in these optimistic predictions — they will have to grapple with a number of critical questions:
- Will the market for high-end corporate legal services continue to expand? The projections assume that demand will continue to grow at historic rates. For that to happen, however, law firms will have to penetrate or create new markets, whether in other countries or new practice areas. But what happens if the market for high-end corporate legal services slows down, reaching what organisational theorists call its “carrying capacity”? Growth could then become more costly for firms because it would come directly from other firms’ market shares.
- Where will firms find the lawyers they need to continue to grow? The entering classes at elite
- How will the firms of the future manage the complexities of their ever-increasing size and geographical scope? The firm of the past had a few hundred lawyers. Several firms today have more than 1,000 — but in 20 years, a 1,000-lawyer firm will be mid-sized. And firms will be much more geographically dispersed. Managing complexity will require that firm leaders continually develop and market their firm’s expertise, while at the same time nurturing talent.
- What will be the organisational identity of firms with an increasing percentage of lawyers outside of its home country? A number of firms will cross the threshold and become global operations — no longer just national firms with an international presence. Will such firms suffer identity crises? Will they be able to create a global identity that unites their partners worldwide?
- Will firms that have avoided international expansion be able to continue to grow? Projections suggest that in 2025 Wachtell will still be wholly domestic and Cravath will have only about 6% of its lawyers outside the
- Which firms are the next up-and-comers? Latham has seen explosive growth in the last 20 years. Can it continue to gain momentum or is it primed to stumble and fall?
- Will a firm like Cadwalader be able to sustain its slow-growth model? PEP of $20m (£10.23m) in 2025 sounds great; 88 equity partners does not, which may indicate a lack of sustainability for the firm’s present model. How can the firm ensure that it has enough young talent to fuel its growth if it permits so few partners to share the jackpot?
- Will the firm of the future be a partnership or a publicly-held corporation? Partnerships of the past started with two or three lawyers and a handshake. Firms today look more and more like corporations, with hierarchical management structures and tiers of ownership. This corporatisation has the potential to lead to drastic consolidation through takeovers, with mid-size firms facing increased pressure to grow and large law firms gobbling up small elite shops.
No growth model can promise that Latham’s 2025 gross will exceed by orders of magnitude the revenues of the entire 1985 Am Law 50, or that in 20 years Bakers will have about as many lawyers as the total number employed by the inaugural Am Law 50. These forecasts are not set in stone; they are merely indicators of what lies within the realm of possibility. But they show that realm to be a land of enormous opportunity and wealth for those firms that are able to build on their history to control their destiny.
Peter D Sherer is an associate professor at the Haskayne School of Business at the
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