How big should a US law firm be? Plus: top 35 innovative firms

How big is big enough for a law firm? And how long before generative AI fundamentally changes its business model? These are the two standout questions preoccupying many US law firm leaders.

After some reordering in 2022 of the top-earning US law firms, with two firms’ annual revenues passing $5bn (one beating $6bn) for the first time, the question of size as a strategic goal has only intensified. Is bigger — revenues, profits, and people — better?

Then, on top of this preoccupation with size, come questions over generative AI tools and how they could revolutionise legal work.

No wonder strategic planning in the US legal industry is in a state of upheaval.

“There is so much fragility in the law firm market,” says Brad Karp, chair of Paul Weiss. “You are faced with coming up with existential strategies every day now.”

Michael Gerstenzang, managing partner of Cleary Gottlieb, points out that, five years ago, the largest firms by headcount and revenues were not necessarily the most profitable. Today, “this is a different competitive landscape.”

The revenues of $5bn-plus reported last year by mega-firms Kirkland & Ellis and Latham & Watkins were accompanied by high profitability per equity partner, which would suggest scale is a meaningful goal for firms with ambitions to be in law’s premier league.

This is challenging the cadre of historically elite, highly profitable law firms, set up in the late 19th and early 20th centuries, whose annual revenues of between $1bn and $2bn now make them look relatively small operations.

Some within this group are already rethinking their business strategy. Cravath, Swaine & Moore has hired UK-qualified lawyers in its London office for the first time, and created a tier of non-equity partners in New York. It was formerly wedded to practising only US law, and to full equity partnership. Others, including Sullivan & Cromwell, are doubling down on a formula that still works for them and delivers the high profitability sought by partners. Bob Giuffra, the firm’s co-chair, sums up the tactic: “We balance litigation and corporate work so we can respond well to market volatility.” The firm had revenues of $1.7bn for the financial year ending in 2022 and profits per equity partner of nearly $6mn, according to FT research partner, RSGI.

At Shearman & Sterling, however, it was a need for greater scale that drove the established New York firm to seek a merger with UK firm Allen & Overy. Shearman’s turnover in 2022 was just under $1bn, and the merger will create one of the world’s biggest law firms by revenue, at a projected $3.5bn — albeit lagging behind the frontrunners.

“I underestimated the value of scale,” reflects Tom Cole, managing partner at Troutman Pepper Hamilton Sanders, formed by two US firms, in 2020. Its revenues for the financial year ending in 2022 were $1.1bn. The effects of merging have “exceeded my expectations,” he says. Among them are the ability to hire teams of people that would have been out of reach for either firm on its own.

The fastest growing North American firms by revenue, over three years to the financial year ending in 2022, feature some new names making incursions into the historical elite. As well as Latham & Watkins and Kirkland & Ellis, the list includes: King & Spalding; Willkie Farr & Gallagher; McDermott Will & Emery; Ropes & Gray; and Goodwin, which all experienced revenue growth of more than 40 per cent in the period, according to RSGI research.

At Ropes & Gray, which posted annual revenues of more than $2.7bn for 2022, scaling up in selected areas has been important. For example, says chair Julie Jones, in private equity it has been a game-changer: “To be credible here, you have to go big.” However, she notes, even more pressing are the skills that lawyers will need to succeed in the age of generative AI. “People who tend to innovation or creativity — this is what we will praise,” she says.

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Most of the 60 or so firms that participated in the research for the FT Innovative Lawyers North America report are actively engaging with the new AI tech. A third are already training staff, developing products for clients, and rolling out customised large language models in order to expedite basic legal tasks, such as drafting and research.

One of the more advanced users of generative AI is Dechert, which has built a customised tool, DechertMind. So far, it has 1,000 active users and has clocked up 50,000 interactions. “All the innovation will be from the bottom up,” says Mark Thierfelder, Dechert co-chair. “The people performing tasks on the ground will be figuring out how to unlock [AI]’s value.”

With more firms now able to boast size and profitability, the ways in which elite firms differentiate themselves is changing. Innovation — or, at least, the willingness to approach work differently — will be more important to clients.

“Lawyers need to hone their leadership skills,” says Jami McKeon, chair of Morgan Lewis. “Skills previously considered ‘soft’ ones will become critical, such as empathy and building cognitively diverse teams.”

Latham & Watkins, which tops the FT’s annual ranking of law firms for the region this year (see index below) was one of the first US law firms to consciously integrate innovation into its strategic priorities 20 years ago. Its ability to do legal work in new ways, incentivise partners with fairer financial distributions, and empower junior lawyers has contributed to its profitable growth.

Increasingly, the more intangible elements of a firm, which Latham & Watkins has long cultivated, will ensure its success: knowledge management and its adeptness at handling change — now including an AI-powered future.

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FT law firm index: North America

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Methodology

FT Innovative Lawyers North America 2023 is a ranking, report and awards scheme for lawyers based in the region, produced by the FT and its research partner, RSGI, based on a unique methodology.

Law firms and in-house legal teams are invited to make submissions. Each submission is researched and scored out of 10 for originality, leadership, and impact — giving a maximum score of 30 for each published entry. Top-ranked entries in the report are shortlisted for the FT Innovative Lawyers North America 2023 Awards.

Some 300 submissions and nominations were received from 61 law firms and 39 in-house legal teams. RSGI researchers assessed and researched them through interviews with clients, senior lawyers, executives, and experts between August and November 2023. Featured entries are the submissions that ranked highest in each category.

FT Law Firm Index

The index provides a ranking and a holistic assessment of law firm success. Participating firms were assessed on submissions to the report and a separate questionnaire, and ranked on the following criteria, with a maximum score of 110:

Innovation
The sum of scores for the top three submissions from each law firm entering the FT Innovative Lawyers North America Awards 2023, including those that were not published. Scores are divided by the highest score and multiplied by 30 to give a scaled score out of 30.

Digital
Law firms completed a questionnaire on their use of data and technology. Each of six questions was scored and benchmarked against other responses (weighted score out of 20);

People
Law firms completed a questionnaire about gender representation, diversity and inclusion, and investment in skills for lawyers and for business services people. Five questions were scored and benchmarked against other law firm responses (weighted score out of 20);

Social responsibility
Law firms completed a questionnaire on their approach to social responsibility. Five questions covering commitment and investment in pro bono work, and social responsibility and ESG reporting were scored and benchmarked against other law firm responses (weighted score out of 20);

Growth (financial):
Law firms were compared with each other for three-year revenue growth to the financial year ending in 2022, and for profit per equity partner in the financial year ending in 2022. Figures were sourced from RSGI’s research (weighted score out of 20).

RSGI research team
Reena SenGupta, Yasmin Lambert, Mary Ormerod, Chris Sharp, Sarah Davis, Mina Jenkins, Molly Reynolds, Tom Saunders, Gitanjali DasGupta