Financial results from the first nine months of the year did little to buoy what had already started off as a weak 2013 for the legal industry, with revenue rising slightly and demand lagging, according to an analysis conducted by Wells Fargo Private Bank’s Legal Specialty Group.
The bank’s report—based on a survey of 125 law firms, including 60 in The Am Law 100 and 45 in The Am Law Second Hundred—found gross revenue up 2.5 percent on average for the first nine months of the year compared to the same period in 2012. At the same time, demand, measured by hours billed, was down 0.75 percent, the report found.
“While we’d like to deliver good news, unfortunately we’re not seeing things turn,” says legal speciality group senior director of banking Jeff Grossman, who shared the survey results with The Am Law Daily. “They’re not getting better except for a few firms that are the top of the food chain. Everyone else is in a state of perpetual pressure on the demand side.”
The nation’s top firms, which Wells Fargo defines as those with profits per partner of at least $2 million, saw their gross revenue increase 5 percent on average during the year’s first nine months, Grossman says. Among all Am Law 100 firms surveyed, the average increase was a more modest 2.7 percent. The Second Hundred firms polled, meanwhile, eked out a 1 percent average uptick in gross revenue.
The results, Grossman noted, cut against a recent buzzed-about study from LexisNexis that showed work moving from the largest firms to those clients consider “big enough.” As The Am Law Daily previously reported, that study found the nation’s largest law firms—those with at least 750 attorneys—had seen their share of outside counsel spending slip in the three-year period that ended June 30, 2013, with firms within the 201-to-500-lawyer range appearing to pick up much of that work.
“[The data] really supports the argument that there are a few firms in this country doing exceedingly well even in this tough environment, and everyone else is treading water or facing significant challenges,” says Grossman, adding that it is high-value deal work that is driving the stratification.
On the demand side, the difference from top to bottom varied slightly, with demand down half a percent on average among Am Law 100 firms and 1 percent among the Second Hundred.
The survey suggests that partners, both equity and nonequity, are struggling to find a satisfactory amount of work. Hours per lawyer were down 1.1 percent across the board through September, to 1,615 on average. That figure average dropped into the mid-1,500 range for equity partners and to the high-1,400 to low-1,500 range for income partners.
“The underproductivity is largely centered in the partner level of all the law firms,” says Grossman, who notes that associates are logging many more hours than partners. “It continues to be one of the biggest challenges law firms are facing. … Not enough partners are being asked to leave.” Ideally, Grossman says, average hours would be in the 1,800 range based on historic norms.
Meanwhile, the survey shows, firms have managed to somewhat offset the decline in demand by raising billing rates yet again. Blended rates are up 4.1 percent, according to Wells, with effective rates (those actually being paid by clients) up 3.6 percent.
One concern for firms, in Grossman’s view, is that expenses and revenue are rising at the same 2.5 percent rate. That, he says, is in part a result of slight increases in head count—though not on the legal secretary front, which continues to see its share of layoffs. A minority of firms also told Wells they expect to reduce head count in the future, with 15 percent saying they expect to cut partners and just under 10 percent saying they plan to thin their associate ranks.
The Wells survey also polled firms on how much debt they are carrying, and found a 6.5 percent drop in line of credit usage. Rather than turning to banks, it appears, firms are keeping their coffers stocked by tapping partners. The survey found average capital levels among the firms surveyed up 4.5 percent, to an average of $285,000 per equity partner (and $335,000 per equity partner in The Am Law 100).
As 2013 comes to a close, some of the firms that Wells polled are realizing they aimed too high when setting their financial expectations for the year. While roughly 55 percent said they would hit their budget targets, one in four said they would fall short of their revenue projections. Less than 20 percent said they expected to exceed their budget. A third of the firms surveyed also said they would be below their budgeted number of hours, Grossman says.
One lesson to be gleaned from the numbers, according to Grossman: In order to succeed, firms need to manage productivity and expenses. “They need to be making changes for next year,” he says.
The Am Law Daily will have additional reports in the coming days on how large law firms are performing financially so far this year based on data collected by Citibank and TyMetrix.