The Foster Group Featured in Law.com on how "'Thoughtful' Headcount Growth Steers Midsize Firms to Steady Financial Outcomes"
/‘Thoughtful’ Headcount Growth Steers Midsize Firms To Steady Financial Outcomes
While a number of factors can play a role in a firm’s financial performance, a thoughtful growth strategy seemed to be important in 2022, according to legal recruiters and Pro Mid-Market columnists Michelle Foster and Drew Foster.
Throughout the next decade - and perhaps beyond - 2021 will likely be viewed as a banner year for financial performance in the legal industry. Demand for legal services surged that year as the effects of the COVID-19 pandemic on the global marketplace receded. As a result, law firms saw record profits.
With that in mind, it should not be surprising to learn that profits for midsize firms in 2022 generally did not keep pace with the prior year’s performance. However, to say that 2022 was not a good year would not be accurate. From a historical perspective, midsize firms posted good numbers last year - just not as good as they were in 2021.
A review of last year’s performance reveals a number of factors that affected financial growth. The following is an assessment of a few of those factors, including some that promise to be important to midsize firms moving forward.
Increased expenses made financial growth more challenging
Firms were forced to deal with a number of expenses in 2022 that were not part of the equation during 2021, including expenses related to lawyers returning to the office. In 2021, the prevalence of pandemic-inspired remote and hybrid work meant office expenses were lower. The loosening of Covid-related restrictions also meant more attorneys were conducting work-related travel, which resulted in more expenses for firms.
An increase in salaries was another factor that contributed to increased expenses last year. The talent wars that raged in 2021 lingered into early 2022 and, as a result, many firms experienced higher salaries (especially for associates) and a higher overall headcount.
Economic uncertainty sent many clients looking for rate relief
While the pandemic played less of a role in the market in 2022, economic uncertainty stepped up as a dominant force. Persistent inflation and global events were among the factors that led to economic volatility, leading clients to tighten their belts and look for more cost-effective options for legal services.
Midsize firms that could offer high-quality work and competitive rates ended up gaining ground in the 2022 economy. While firms of all sizes raised rates in 2022, those charged by midsize firms were still typically below those of larger firms, making them a strong alternative for clients monitoring their legal spend.
One development that could have contributed to the success of midsize firms in 2022 was the movement of certain practice areas away from larger firms. The Thomson Reuters Institute 2023 State of the Legal Market Report found that firms at the higher end of the rate scale are reducing their involvement in certain practices that have been found “no longer as economically viable as they once were.” It suggested these areas, of which labor and employment is an example, are “moving down market” to midsize firms. The report also said this shift should be expected to continue in the coming years.
Firms stayed profitable by focusing on thoughtful growth
In a shifting market like that experienced in 2022, thoughtful growth was proven to be an effective strategy for strong financial performance. Talent was more available to midsize firms and those firms that took advantage of this availability to grow their strengths or add new, promising skills saw greater success.
New Orleans-founded Adams and Reese provided an example of this. As reported in Law.com, the firm leveraged good recruiting to achieve a 6% revenue increase over its 2021 numbers. One factor involved in the firm’s success was the acquisition of a 16-lawyer construction-focused law firm. Adams and Reese managing partner, Guilford Thornton, explained the acquisition as a decision that “took our already strong practice and moved it toward dominance.”
Akerman, a highly successful and vibrant middle-market firm, reported an 8.8% gain in revenue in 2022, allowing it to pass the $500 million mark for the first time. Speaking with Law.com, Akerman CEO and Chairman Scott Meyers pointed to the addition of several new practice groups as one factor that added value to the firm. The Law.com report, which noted Akerman’s headcount grew by 1.9% in 2022, said Akerman is looking to continue its expansion in 2023.
Additionally, Taft Law reported 32% revenue growth in 2022, which it attributed primarily to its combining with Detroit firm Jaffe Raitt. The firm’s leader's pointed to mergers and lateral acquisitions as a way of achieving “economies of scale.” Managing partner Bob Hicks said, “If you hire a lateral, they travel light. They come over with their revenues and their salaries, but they don’t bring a secretary.”
Law.com also reported that Fort Lauderdale-based Greenspoon Marder hit record numbers in 2022, increasing revenue by 16.4% over 20221. The firm cited recent lateral acquisitions - including a Latin America group and a franchise law group - as examples of growth that drove performance. While a number of factors can play a role in a firm’s financial performance, a thoughtful growth strategy seemed to be important in 2022, especially with other midsize firms that reported flat financial performance citing a dip in their headcount.
The thoughtful growth practiced during 2022 may be a byproduct of lessons learned during 2007 and 2008. During those years, economic slowdowns led to large-scale layoffs in the legal field. When the market came back in 2010, many firms were left severely understaffed and found themselves scrambling to hire attorneys who could handle the influx of new work.
Thoughtful growth seemed to be a central component of hard-earned financial growth in 2022. If the market continues to be uncertain, prospective clients will continue to look for quality legal services at affordable prices. Midsize firms could be the ones that secure those clients, provided they have secured the talent to do the work.