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Law Firm Revenue Up, But So Are Expenses

May 18, 2018, 9:36 PM

Law firm revenues up 4.2 percent so far in 2018

But expenses are also rising and client payments are harder to nail down

Higher billing rates and stronger client demand pushed up law firm revenues by 4.2 percent in the first three months of 2018, a new report shows, raising prospects of a sustained recovery for an industry slow to fully get back on its feet after the financial crisis a decade ago.

Some of the growth numbers “were the strongest we’ve published in years,” the report by Citi Private Bank’s law firm group said. It noted the industry overall was positioned for a strong second quarter as well.

But there are still a few yellow flags, including expenses that outpaced revenue growth mainly due to higher compensation for the most desired talent. Also, the good news was not uniform among firms, and lawyer productivity was flat overall.

When you look behind the numbers, “one firm’s success comes at the expense of another firm. About half the firms are growing and the other half is shrinking,” said David M. Altuna, a report co-author.

Citi collects data from almost 180 law firm clients not identified individually. The information is used in aggregate to identify trends.

The firms break down this way: 80 are among the Am Law 100 largest, 47 are in the second set, and 52 are boutiques.

Higher Rates

Overall, billing rates were up 4.8 percent, the highest on record since the first quarter of 2008, just before the financial crisis began to batter firm bottom lines, the report showed. Client demand rose 1.3 percent, which was the highest since the first quarter of 2016.

Expenses, however, were up 4.8 percent for the period. Also, slowness in client payments was a drag on higher billing rates, and the increase in client demand was not greatly improved compared to recent years.

“Demand has been quite modest since 2009. It’s been on average less than 1 percent,” Altuna said.

Volatility, Uneven Results

The top 50 biggest firms fared best. Following a pattern set in 2016 and 2017, these firms saw larger increases by most measures.

Their revenues rose 5.3 percent, client demand went up 2.6 percent, lawyer billing rates were up 5 percent and lawyer productivity saw a trace increase.

The results across all firms also showed uneven performance and volatility.

For example, some 47 percent of firms reported a decline in client demand, and 130 firms that saw an increase in the same period a year ago, reported a decline this time.

The best-case scenario for the majority of firms is “a more jagged path towards growth” trajectory, the report forecast.

Expenses Up, Partner Squeeze

On the expense side, the largest firms reported the biggest expense growth at 6.5 percent, outpacing revenue growth.

Citi’s examination of firm spending found that expense increases overall were driven more by compensation for firm personnel than by operating expenses, which went up 3.8 percent.

Compensation rose 5.9 percent as law firms aim to lure top talent from rivals or from government. Firms want lawyers with established client lists or who are seen as rainmakers.

Even as firms scout talent, they are reducing the number of equity—or owner—lawyers, a figure that declined fractionally. One reason is that baby-boomers are gradually retiring, which slims partnership numbers. Firms also have delayed promotions and made it more difficult for partners to keep their jobs. All of this has contributes to the lower number of equity partners.

Other concerning news involved flat lawyer productivity, which means output was roughly even with a larger number of lawyers at firms. There is continued hiring with the number of lawyers at firms rising 1.8 percent in the first three months of the year.