In 2015 — the year that New York Yankees superstar Alex Rodriguez will surpass 762 home runs and break the Major League record — Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom will both gross more than $5 billion. Baker & McKenzie will have more than 6,600 lawyers, and the lucky partners at Wachtell, Lipton, Rosen & Katz will bring home about $7.7 million apiece — a handsome sum, but one that will itself be dwarfed by the $15.7 million Wachtell partners will average in 2025.
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’ll break the record. Nor can we know for sure exactly how rich Wachtell partners will be, or how huge a behemoth Baker & McKenzie 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 scrutinize 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 head count 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 $23 billion in 2025 — may seem hard to swallow. But remember: Large U.S. corporate law firms have enjoyed astonishing growth since the inaugural Am Law survey in 1985. Who would ever have thought that Wachtell would see its profits per partner go from $795,000 in 1984 to almost $5 million today? Or that Skadden’s gross revenue would balloon from $129 million in 1984 to more than $2 billion in 2007? While these nominal values overstate the real dollar values ($4 million today would be equal to roughly $2 million in 1984), even the inflation-adjusted figures show that firms have made extraordinary — if not hard-to-believe — gains in the last two decades. They also highlight, in retrospect, the highly speculative nature of prediction. But it’s that very lack of certainty that makes prognostication so irresistible.
The projections make it clear that U.S. 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 $1 billion in 2025. Six firms, on the other hand, will gross more than $10 billion: Kirkland & Ellis; Mayer Brown; Baker & McKenzie; Jones Day; Skadden; and Latham. By 2025 Latham, at $23 billion, will have dramatically outpaced Skadden, its nearest competitor at $15.9 billion.
The PPP projections for 2025 have Wachtell partners bringing home almost $15.7 million (before adjusting for inflation). Cravath, Swaine & Moore’s PPP will be $9.6 million; Skadden’s $6 million; and Baker & McKenzie’s $2.5 million. The highest 2025 projected profits per partner are at Cadwalader, Wickersham & Taft, where the model suggests partners will net nearly $20 million apiece in 2025. But don’t 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 biggest of the 47 firms in the analysis, with 13,824 lawyers; Baker & McKenzie will follow closely behind with 13,512. More than three-quarters of the lawyers at both firms will be based outside the United States. Jones Day will have 11,623 lawyers and Latham 11,066, of whom almost 40 percent will be international. Cravath and Wachtell will remain relatively small, with 832 lawyers and 400 lawyers, respectively.
Those 11,066 Latham lawyers will generate revenue per lawyer of more than $2.3 million in 2025, but they’ll be outdone by the lawyers at several firms with RPL of more than $3 million. These include Kirkland ($3.1 million); Cadwalader ($3.2 million); Cravath, Davis Polk & Wardwell and Paul, Weiss, Rifkind, Wharton & Garrison (each at $3.6 million); Simpson Thacher & Bartlett ($4.2 million); and Sullivan & Cromwell ($5.6 million). Wachtell will generate a chart-busting RPL of $7 million in 2025.
And as the roster of firms atop the PPP 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 ($775,000); Hunton & Williams ($750,000); Dorsey & Whitney ($670,000); and Baker & Hostetler ($555,000). They will trail still farther behind the pack in 2025, with Fulbright at $1.8 million; Hunton & Williams at $2.1 million; Dorsey at $1.2 million; and Baker & Hostetler at $1.4 million. Big firms will become bigger 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 organizational 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 U.S. law schools are either not growing or growing at a rate insufficient to fill the future demands of elite law firms. Firms will have to do much more to find, retain and develop talent — and perhaps to outsource more work. These projections also suggest that more firms will need to merge.
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 midsize. 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 organizational identity of firms with an increasing percentage of lawyers outside the U.S.? A number of firms will cross the threshold and become global operations, no longer just U.S. 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 percent of its lawyers outside the U.S. If the market forces them to move to a more global model, they may suffer significant financial and cultural costs, especially if they have to move quickly. Domestic firms with less marketable reputations may be hurt even more if they have to play global catch-up.
Which firms are the next up-and-comers? Latham & Watkins 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? Profits per partner of $20 million in 2025 sound great; 88 equity partners doesn’t, 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 corporatization has the potential to lead to drastic consolidation through takeovers, with midsize 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 Baker & McKenzie 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 University of Calgary, specializing in strategy and management with a focus on law firms. He was the lead author of a study on institutional change in law firms that was named the Best Paper of 2002 in the Academy of Management Journal.
See related Am Law 100 coverage, including the 2007 financial figures for the top firms.