The year 2020 is predicted to be robust for law firms with healthy revenue growth, but Citi Private Bank is still cautioning law firms in its latest report on the industry to prepare for more uncertainty ahead.
The report from the bank’s Law Firm Group and Hildebrandt Consulting said revenue growth will rise between 5.5% and 6% for 2020, which would match growth in 2019. It does not predict that a recession will hit this coming year, though that’s not a universally shared viewpoint across the legal industry.
“It’s really important that the fundamentals are sound,” said Gretta Rusanow, head of advisory services for Citi’s law firm group. “Demand growth is up each quarter, and the prices of services is up. But at some point, there may be a downturn, and it’s not a bad idea for firms to take 2020 and figure out where they are well positioned.”
Even if recession is not looming, “law firm leaders should learn lessons from the past and avoid the temptation to overreact,” according to the 2020 Citi Hildebrandt Client Advisory. “Evidence collected over many years tells us that recessions tend to have a modest impact on the legal sector. At worst, firms tend to experience modest falls in profits or revenue, typically by the mid-to-low single digit amounts.”
Still, the report said, firms that want to prepare for a downturn could keep a close eye on headcount in recession-sensitive practice areas and direct investments to counter-cyclical areas. The report suggested that in a run-up to a downswing, firms look especially hard at whether pay for each tier of lawyers correlates with the income they bring into the firm.
But it cautioned against firms making “excessive cuts to junior associate headcount, simply to ensure that partners maintain their own levels of compensation.” The report said this is because demand for junior to mid-level associates tends to rebound quickly after a recession, and these associates can be disproportionately expensive to replace following a downturn.
2019 and Beyond
In 2019, firm revenue growth across the board stemmed from higher rates. Over the first nine months of the year, rates grew at the fastest clip, 4.7%, since before the 2008 recession.
“There have been two strong years for firms in rate increases. Rates have gone up right across the board, for the 50 largest firms, as well as the second 50, and the second 100 firms,” said Rusanow.
Overall, though, demand trailed 2018, growing by a modest 0.9% in 2019’s first three quarters.
Compared to last year, growth in demand has been more evenly spread across different sized firms. In 2018, the top AmLaw 50 firms and boutique firms chalked up impressive performances. In the data collected so far this year, second hundred largest firms in the AmLaw rankings outperformed top 50 firms, with 0.9% demand growth. The top 50 had demand growth of 0.8%.
And in this year’s data collected so far, firms in the AmLaw 50 to 100 rankings, were the best performers with a 1.8% rise in demand.
Specialized small firms saw a 1.1% decline in demand in the first nine months of the year, reversing the strong demand increases these boutiques enjoyed in 2018.
Overall, the report found that “a significant drag on revenue growth was the lengthening of the collection cycle— a trend we have seen for some time.” Clients are delaying paying their bills, and firms need to “remain focused on collections,” according to report findings.
On the job market, firms showed interest in adding equity partners and associates, two job categories that had been shrinking, according to the report. Firms are also looking for a solid financial foundation by using contract attorneys and other lower-cost lawyers to have the flexibility to handle legal matters.
The report pointed out that the Big Four accounting firms continue “their low-key experimentation in the U.S. legal market.” For now, it said, they remain focused on “relatively niche” legal services such as immigration, labor, cybersecurity, and risk management.