May 4, 2018
A recent Texas Lawbook story by Mark Curriden, “Texas Companies Paid Record Legal Fees in 2017,” reports that Texas companies paid law firms that represent them a record-setting amount of money in 2017 and an increasing percentage of those legal fees are going to national law firms that have recently opened offices in Houston, Dallas and Austin.
Exclusive new financial data collected by The Texas Lawbook shows that the 50 largest corporate law firms operating in Texas – nearly all of them with offices in Houston – employed essentially the same number of lawyers in 2017 as they did in 2016 and 2015, but those law firms are charging higher rates and making considerably more money.
Nearly two-dozen law firms in Texas, led by Houston-based Vinson & Elkins and national firms Kirkland & Ellis and Winston & Strawn, generated record high revenues last year as a result of them routinely charging corporate clients $1,000 an hour or more.
At the same time, several large Texas legacy law firms are struggling for survival or at least seek stability. "The Texas corporate legal market is experiencing dramatic changes and these changes are expensive," said Chicago law firm consultant Kent Zimmerman. "The numbers confirm that the rich law firms are getting richer and some long-time Texas law firms are getting left behind."
Legal industry analysts say the most important statistic in The Texas Lawbook data is the fact that revenue per lawyer at 14 law firms operating in Houston now exceed $1 million a year – an amount previously achieved by the most elite and expensive national firms. Only two of the 14 firms – V&E and Baker Botts – are headquartered in Texas.
"The formula for success is simple," Zimmerman said. "The law firms that pay the most get the best lawyers. The best lawyers get the best clients and the best work. The best clients pay the highest rates and generate the best revenues. And then you can use those revenues to pay the best lawyers and the cycle starts over again."
The 50 largest legal practices in the state generated $5.65 billion in revenues from their lawyers who office in the state – a 2.4 percent increase from 2016.
But the data also shows that elite national law firms that have opened offices in Houston and Dallas during the past few years are growing considerably faster than law firms headquartered in Texas and that growth is mostly at the expense of locally based firms.
Two excellent examples are Chicago-based Kirkland & Ellis and New York-based Simpson Thacher & Bartlett.
Kirkland opened its Houston office in April 2014, but it now has more than 130 lawyers and generated an estimated $187 million in revenues in 2017, making it the 11th largest legal operation in Texas.
Simpson Thacher, which debuted in Houston in 2011, has witnessed significant growth the past three years – from $25.6 million in revenues in 2015 to $47 million in 2017, an 83.6 percent jump.
The Texas Lawbook analysis of the exclusive data involving the 50 largest corporate law firms operating in Texas shows that:
- Nearly 40 percent of the 7,000 corporate lawyers in Texas are now employed by law firms headquartered outside of the state;
- The Texas offices of national law firms generated $2.57 billion in 2017 – a 38 percent increase from just two years ago;
- By contrast, lawyers for Texas-based law firms brought in $3.1 billion in revenue in 2017, which is the same amount as the previous two years; and
- Thirty-three of the top 50 law firms by revenue generated from their Texas offices were based outside of the state – up from three of the top 50 just seven years ago.
To be sure, large Texas legacy law firms – V&E, Baker Botts, Bracewell and Locke Lord, for example – still generate billions of dollars in combined revenues, employ thousands of lawyers and still do a huge majority of the legal work for businesses in Texas. Many of them are experiencing tremendous financial success.
The Texas Lawbook obtained the financial data from interviews with law firm leaders, law partners who recently departed the firms and legal industry analysts. Only one law firm – Houston-based Susman Godfrey – refused to provide any kind of statistics to The Texas Lawbook.
The 2017 data shows that Houston-based V&E is now the largest legal operation in Texas by revenue. V&E lawyers in Austin, Dallas and Houston brought in an estimated $484 million – a 6.6 percent increase over 2016 and a 15.5 percent jump from 2015.
"We had a truly fabulous year – a record year," said V&E Chairman Mark Kelly. "Demand was up, which was good. We have 112 summer associates coming in. So, we are ramping up for another great year and for expansion."
While national law firms have raided V&E for scores of lawyers during the past seven years, legal industry analysts say that V&E has also benefited from the national invasion in one simple way: the elite national law firms with dramatically higher rates provided cover to V&E to significantly increase the rates it charges clients.
Most Texas-based law firms decided to use their lower hourly rates as a marketing tool to retain business. But V&E, according to legal consultants, took the opposite approach.
"The challenge for law firms is attracting and keeping the best legal talent," Kelly said. "For law firms with revenues less than $1 million per lawyer, it will be tough for them to compete. We want the high-end work and that means we need the top talent."
Lawyers in the Texas offices of Baker Botts had $378 million in 2017 revenues for its Texas offices.
Haynes and Boone and Jackson Walker are two Texas-based law firms that increased their lawyer head count and their revenues at their Texas offices.
Haynes and Boone increased its Texas revenues to $272 million, which is 15.3 percent higher than in 2015. Jackson Walker's revenues hit $249 million in 2017, which is a 12.6 percent jump from two years earlier.
"2017 was our best year ever," said Haynes and Boone managing partner Tim Powers. "We saw strong performances across the board and we benefited from our clients doing some really great things.
"We are cautiously optimistic about 2018," Powers said. "The tax reform law will hopefully drive significant investment in Texas and infrastructure legislation could mean good work in the next year. But a trade war could have a devastating impact."
Thirteen law firms have seen their revenues in Texas grow by 20 percent or more from 2015 to 2017. All but one – Houston-based Gray Reed – is headquartered outside the state.
Gray Reed, which has 140 lawyers in Houston and Dallas, has seen its revenues grow from $50.4 million in 2015 to $65.7 million last year – a 30.5 percent jump.
"We've had three consecutive years of record revenues," said Gray Reed managing partner J. Cary Gray, who added that the firm has no interest in growing outside of Texas or merging with another firm. "There are certain legal services that people and businesses need handled by high quality lawyers, but they don't want to pay $1,000 an hour for it. That is our sweet spot."