In the previous three articles, we analyzed profit margin (defined as operating income divided by revenue) trends in the AmLaw 100. Here we will analyze behavior at one level below, that is, at the individual firm. Specifically, we examine both magnitude and direction of profit margin changes from one year to the next. We also dig into the relationship between profit margin and differential in rates of growth in RPL and CPL.

Profit Margin and Growth Rates in RPL and CPL

In prior articles, we proposed a formula to express future profit margin for any future year, say T years from this current year 0, in terms of current RPL and CPL, and their cumulative average annual growth rate (CAGR). This formula shows future profit margin is directly proportional to current level of profit margin; as also the differential between the growth rates of RPL and CPL. Profit margin rises when RPL growth rate exceeds CPL growth rate. Conversely profit margin falls when CPL growth rate exceeds RPL growth rate. The magnitude of profit margin change is driven by the differential between growth rates of RPL and CPL. Specifically, we look into two historical years, 2017 and 2018 for the Am Law 100, and the profit margin changes for each of the 100 firms using this formula: