Bloomberg Law
Jan. 18, 2017, 3:47 PM UTC

The Trump Bump in Profits Per Partner (Perspective)

Editor’s Note: The author is formerly a senior partner at The Boston Consulting Group and COO of Ropes & Gray.

While the regulatory environment under a Trump administration may lead to less work in some practices — such as antitrust litigation — overall, corporate transactional work will be on the rise with more investments to be had. And specific practice areas aside, history has shown that the direction of the economy has a stronger effect on profits per partner (PPP) of elite law firms than is often appreciated.

To demonstrate this, I’ve included a chart below that compares U.S. GDP with elite law firm PPP over the past 20 years. Specifically, the black line shows the year-to-year percentage change in real GDP, as reported by the U.S. Bureau of Economic Analysis (BEA), while the red line shows the year-to-year percentage change in average PPP of the 25 most profitable U.S. law firms (on an inflation-adjusted basis), according to The American Lawyer.

As you can see, the lines move closely together, demonstrating a strong link between the economy and firm profitability.

Of course, the sensitivity of PPP to the economy varies by individual firm, based on the firm’s practice make-up. Some firms — including some with strong restructuring practices — are counter-cyclical and perform particularly well in a down economy.

Economy sensitivities are typically measured in terms of a ‘beta’; for example, a beta of 2.0 implies PPP would increase by two percent for every one percent increase in GDP. I’ve included a table below, which shows the betas of those of the 25 most profitable U.S. law firms that have betas greater than two. The firms’ betas are determined based on the mathematical relationship between each individual firm’s PPP history from their ranking in The American Lawyer and the annual GDP data from the BEA. There are some stunningly high betas, more akin to highly-cyclical businesses than to the stable profession we think of law as being.

What this shows us, I think, is that if the new president does indeed bring about an increase in economic growth, it will be a good thing for elite law firm profitability generally. However, as has been the case across much of the economy as of late, the benefit would be far from evenly spread.

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