A recent industry report by Thomson Reuters highlights this trend, showing a stark contrast in the growth of associate headcount within these two segments of the market.

While the overall number of full-time equivalent lawyers has increased by roughly 3.3% annually in 2022 and 2023, the expansion of associate ranks tells a different story. Am Law 100 firms have increased their associate headcount by a mere 1.7%, including their fall classes. In contrast, firms beyond the Am Law 200 have ramped up their associate numbers by 11.8%. The disparity is even more evident in the recruitment of first-year associates, with a 15.2% decrease in the Am Law 100 as opposed to a 3.2% decrease in midsize firms.

Expert analysis suggests that these hiring strategies are likely to continue in the short-term. Large law firms are in a phase of rightsizing after a spree of hiring in 2021, primarily due to fluctuating demand in transactional work. According to Bill Josten, strategic content manager for Thomson Reuters, and Kent Zimmermann, a consultant at Zeughauser Group, these trends reflect a strategic response to the current market conditions and are anticipated to persist into 2024.

Conversely, midsize firms are actively recruiting associates to address a looming generational gap, with a significant number of partners nearing retirement. This aggressive hiring is part of a long-term strategy to ensure a well-balanced workforce.

The impact of these hiring strategies on profitability is significant. For Am Law 100 firms, a conservative approach to hiring has contributed to a positive shift from -5.3% to 2.0% in profit per lawyer growth. Midsize firms have also seen improved profitability, albeit with a lower increase in billing rates compared to their larger counterparts.

Nonetheless, these short-term gains may come with longer-term risks. For larger firms, the reduced intake of associates could affect their future capacity and ability to leverage. Midsize firms could face overcapacity if demand swings back towards larger firms.

The report also draws attention to the Second Hundred firms, which face a complex scenario. They have experienced higher associate growth and salaries than Am Law 100 firms, but with less demand growth than midsize firms. Despite these challenges, Second Hundred firms have the potential to capitalize on their position in the market, balancing a wider reach with competitive pricing.

As the legal industry navigates these evolving trends, the strategic decisions made by law firms around associate hiring will have lasting effects on their growth, profitability, and market positioning. The comprehensive analysis provided in the full report offers valuable insights into these developments.