The sooner law firms realize that the boom years are not coming back, the sooner they can begin to accept that low single-digit revenue growth is something to cheer about, two industry advisers stress in a report released Monday.
The 13-page client advisory, produced by Citi Private Bank’s Law Firm Group and Hildebrandt Consulting, lays out a changing law firm landscape—one that sees partners billing fewer hours than they did before the recession while investing more into their firms through capital contributions; associates occupying a shrinking slice of salaried attorney positions; and leaders acting more like businesspeople than lawyers.
Firms “can no longer rely on a rising tide that lifts all boats,” the coauthors write. “In fact, the tide is out.”
Demand for legal services dropped an average of 0.4 percent between 2008 and 2012, according to the advisory, compared to an average 3.7 percent increase between 2004 and 2008. Rates are rising at a slower pace now than before the downturn, and average revenue growth of 9.8 percent in the earlier time frame compares to just 0.8 percent growth in the more recent years.
“With too many lawyers chasing too little work, pressure from clients to provide discounts and other forms of pricing concessions has become a fact of life in the current market,” the paper says. In an interview, Gretta Rusanow, a senior client adviser in Citi Private Bank’s law firm group, says firms need to find niche practice areas that clients don’t want to bring in-house and that competing firms haven’t yet bulked up on. As an example of an area that found success in the past, Rusanow cited the emergence of Sarbanes-Oxley work following the law’s enactment in 2002.
Dan DiPietro, chairman of the law firm group at Citi Private Bank, added that firms “can also be just fine” by going after what others consider commodity work, as long as the cost structure is right.
The dip in demand has resulted in average hours per lawyer falling to 1,641 in 2011, versus an average of 1,742 from 2001 to 2007. Partners are likely responsible for most of that lag, since the report notes that associate productivity is returning to prerecession levels. (Generally speaking, large firms often demand between 1,850 and 1,950 billable hours for associates to be eligible to receive a bonus.)
In the year ahead, Citi Private Bank and Hildebrandt say demand for legal services might inch up as the economy improves and as deal activity, particularly in private equity, picks up. Even so, the forecast for revenue growth looks “somewhat weak,” according to the advisory.
DiPietro says there are firms “we have some concerns about,” kept on a so-called watch list that he first mentioned publicly to Bloomberg in October. Heavy lateral churn, high bank debt, weak leadership, and cracks in firm culture are all possible warning signs, he says, though he doesn’t think any firm is in “imminent” danger.
Then again, he concedes that the bank’s “powers of prediction” are not 100 percent, saying they weren’t able to see years in advance that now-defunct firms the bank lent to were on the brink (Such firms include Thelen, Howrey, and Dewey & LeBoeuf). “If we were [able to predict that], we would have exited as gracefully as possible,” he says.
The bottom line, according to the report, is that the prosperity between 2001 and 2007 was an aberration rather than the norm: “We think it is time to let go of any lingering notion that the industry will revert to the boom years before the Great Recession any time soon.”
Partners still clinging to that notion are in part driving lateral movement, Citi Private Bank and Hildebrandt say, as lawyers look for a firm that can turn a higher profit than the one they’re leaving. Disappointment can be found on both sides of a move; a survey of law firm leaders cited in the report found that while the majority of lateral hires work out, 17 percent are unsuccessful, with another 23 percent considered “breaking even.”
An increased dependence on capital contributions hasn’t seemed to slow lateral moves. As firms aim to decrease reliance on bank loans—which served as huge factors in the demises of Thelen, Heller Ehrman, Howrey, Dewey, and others—they are asking more of their partners. The advisory says partners contributed an average of $317,000 in 2011 versus $190,000 in 2004.
Income partner ranks are also expanding, rising to 19 percent of salaried lawyers in 2011 compared to 10 percent in 2001. That group, however, has been less productive on average than either equity partners or associates, according to the advisory, leading to “a negative impact on profitability in recent years.”
Rusanow and DiPietro insist that there’s hope despite the glum statistics, saying they are optimistic about the industry and how law firms are adapting to the current environment. As for 2013, Pietro says, “If you’re comparing it to a new definition of what a good year is, I think the year will be just fine.”