Big Law Client Bills Pile Up, Stymying Firms’ Revenue Gains

The largest law firms are waiting for clients to pay legal bills for big-ticket tech transactions before they can maximize revenue gains, a survey released Wednesday shows.

Big Law’s uncollected legal fees in the first quarter grew nearly 17% compared to the same period last year, outstripping a more than 13% uptick in gross revenue, according to analysts at the Wells Fargo Legal Specialty Group. Firms are sitting on a glut of unrealized revenue largely from brokering lucrative deals involving artificial intelligence, data warehouses, and infrastructure projects.

“All the big AI firms are in the process of going through an IPO and there are a ton of other deals taking place—data centers and infrastructure work,” said Owen Burman, a senior consultant at Wells Fargo’s Legal Specialty Group. “There’s a lot of work that hasn’t been collected on yet.”

The surge in outstanding inventory augurs for massive gains for Big Law firms later in the year. They’re also hoping for a resolution to the Iran War and a decrease in interest rates, which could boost financial gains.

Record price hikes that have received little pushback from clients drove revenue growth for the 200 biggest US firms, the Wells Fargo data show. Firms raised rates by an average of 11.4%, following three consecutive years of record-shattering hourly rate increases, according to responses from 103 of the 200 largest firms.

“If the Iran War can get resolved and we see one or two interest rate cuts, I don’t see why we wouldn’t see improvement in the back half of the year,” said Les Starck, senior consultant with the Wells Fargo group. “Mid-market transactions is where everyone is holding their breath.”

The gap between inventory and revenue revealed in the Wells Fargo study highlights Big Law’s exposure to corporate deals, Burman said, citing “anecdotal evidence” from feedback from Big Law respondents. “When we talk to firms, they are seeing growth across the board but greater exposure to transactions,” Burman said.

Collections at firms slowed by 6.5 days or by 3.4% compared to last year’s first quarter. Firms’ rate of realization—how much they collect versus billable hours logged—declined 2.8% due to a plethora of corporate work concentrated in the tech practices at the 50 wealthiest law firms, Burman said.

Corporate legal departments are becoming more sophisticated about how they allocate legal work, sending only the most valuable matters to outside counsel while deploying legal tech and alternative legal service providers for others, Burman said.

“Clients are agreeing to the rate increases, and it’s good inventory from what we can tell,” he said. “They are finding ways to keep work in-house and find alternative legal service providers, but when they have to send out work, they are paying. It highlights that regulatory advice is a big spend in corporate America.”