Financial Check-In: Here’s the State of the Legal Industry

Nov. 29, 2016, 11:08 PM

On Tuesday, Wells Fargo Private Bank’s Specialty Group released a report on how law firms performed in the first nine months of 2016.

Like a check up from the doctor, no matter how good things look, there’s always some concern lurking in the background.

This year, the rates attorneys charge increased 3.6 percent and on average attorneys said they expect them to increase another 4.4 percent the following year. And overall, there was 4 percent growth in revenue for the industry.

But in what have become common trends, repeated over and over, the survey found disparities between elite and non-elite firms:

  • The most profitable firms — those with profits per equity partner in excess of $2 million — are also the busiest. Their partners are projected to log an extra 100 hours this year compared to everyone else.

  • But in comparison to 2015, even they’re seeing productivity drop: At elite firms, the number of hours for all lawyers is projected to decline by roughly 2.7 percent on an annualized basis, compared to a 2.3 percent decline at AmLaw 50 firms and a 1.7 percent drop at AmLaw 100 firms.

  • Those associate salary expenses hurt. With demand flat or declining, law firms are raising rates to keep growth strong.

The report’s authors called the decline in demand across all timekeepers, the “most vexing issue” for the industry.

The survey is based on the first three quarters of 2016, and draws on a survey of 130 law firms, more than 60 of which are AmLaw 100 firms, and the remainder are either AmLaw 200 firms or regional firms.

We caught up with Joe Mendola, senior director of sales at Wells Fargo Legal Specialty Group to drill down into what the catch was for the industry.

Big Law Business: There was strong revenue growth, what’s the catch?

Mendola: Well, the catalyst for the last several years has been rate growth. We saw our average standing rate for all attorneys go up 3.6 percent. But demand has continued to be relatively stagnant. There’s been less than 1 percent overall increase in demand.

Big Law Business: How much tolerance is there for rate increases?

Mendola: If you look back to 2007 and 2008, to the AmLaw firms, the realization was in the 88 or 89 percent range. If you fast forward to 2016, realization has dropped to about 81, 82 percent. The decline in realization has leveled off a little bit. It took a big drop after the economic downturn and has continued to drop by smaller amounts. I expect it’ll be nominal [this year].

Big Law Business: Why are rising expenses a concern?

Mendola: The associate salary increases that occured in 2016 were not built into the plan. There was not an expectation that associate salaries would go up in 2016. That means, all that money is coming out of the pot that partners were expecting to receive. And expectations are expectations. A lot of firms are looking much more closely at their expense bases, and where they have overcapacity — in terms of timekeepers — and trying to reduce that overcapacity.

Big Law Business: What about other general expenses?

Mendola: Firms are looking to bring down their square footage per attorney. When leases expire, we’re seeing many firms reduce their space by 15 percent to 20 percent. Things like high deductible benefit plans also come into play. My sense is that firms are looking at all of this.

Big Law Business: All because demand is flat. Why?

Mendola: I don’t know that there’s one answer to that question. Companies are building up their in-house legal departments — that’s a major contributor. I think technology is another contributor. The way people do in-house discovery – they used to put hordes of people in a warehouse. Now, you can do that with technology. There’s third-party vendors that take that task away. If you think about it even accounting firms are building their legal departments, particularly overseas. Another one is corporate America is less inclined to litigate forever. The tendency has been to settle. So there’s certainly a lot of reasons for the stagnant demand.

Big Law Business: Think they’ll be able to raise rates again next year?

Mendola: We asked, and the answer we received back was the standard rate increase is expected to be 4.4 percent.

Big Law Business: What was your most surprising finding?

Mendola: One of the things I’ve been struck with is that demand is stagnant, and the industry continues to grow their attorney staffing. So attorney staffing was up 2.2 percent. That’s not a whole lot, but when you’re not growing your demand, your work levels, you have to step back and say why? Essentially, there’s more people and less work. For recruiting purposes there could be reasons, but I find it surprising.

Big Law Business: I noticed the average age of a partner is increasing.

Mendola: There’s lot of reasons for that. First of all, you think of the baby boomer generation. Generally speaking, people are healthier and want to work longer. The majority of firms do not have mandatory retirement ages. That combination is a big factor. So the average age at an AmLaw 100 firm for an equity partner is 53. The second 100 would be a little more, I want to say, 54 and 55, in that range.

This is more of a gut feeling, but those firms that do have mandatory are more in the AmLaw 100. I think profitability is another factor. In general, the Am 100 are more profitable and that impacts your decision on retirement.

Big Law Business: Yeah, so what would you say to young associates aiming for partner?

Mendola: I think what’s changed in a big way for associates is in years gone by, if you were a good attorney and worked hard, the likelihood of making partner was pretty good. Today, you not only have to be a good attorney from a skills basis, but have to be able to generate revenue. Interpersonal skills, that’s all part of it.

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