a sample chart with upward trend
()

New York-based law firms on average grew their profits per equity partner by 9.5 percent last year, far outpacing the industry average, according to a Citi Private Bank annual survey that credited a mix of moderate revenue growth, fewer equity partners and a tight control of costs for the rise.

“It’s fair to say strong expense control has helped New York firms because the revenue growth was decent but, if not for a very disciplined focus on expenses, you wouldn’t have quite the increase on the profits side,” said Dan DiPietro, chairman of Citi Private Bank’s law firm group.

Citi surveyed 180 law firms, including 26 headquartered in New York. Among the 26 New York firms, five are national and 21 are regional, meaning they have more than half of their lawyers in New York.

The 9.5 percent increase is the largest rise in profits per equity partner at New York firms since the 2008 financial crisis, said DiPietro. Among all firms surveyed nationwide, profits per equity partner grew an average of 3.5 percent from 2012, according to the survey results.

New York was the only legal market to see an increase in productivity last year, as there was greater growth in demand for services than in head count growth. The rest of the legal market still had excess head count, DiPietro said.

“With a pick up in demand, they [New York firms] were able to absorb that work without a significant increase in head count,” he said, adding that expense control included limiting head count on lawyers and staff.

The number of equity partners at New York firms declined 1.7 percent in 2013 compared with the industry’s 0.3 percent decline, the survey found.

“I don’t think most firms have done formal layoffs” in 2013, DiPietro said. “But I think they’ve been very aggressive on their performance reviews … and they’ve certainly cut back on the size of incoming classes.”

Large firms have raised their standards in quality of work and billable hours, while the size of incoming associates classes at Am Law 100 firms remains about 40 to 50 percent lower than it was pre-2008, DiPietro said.

However, he said firms consider lateral hiring differently, and lateral hiring continued last year at rapid clip.

“There is a presumption of revenue that is going to come with those laterals,” DiPietro said. “Anytime you are in such a slow growth mode, your revenue growth is going to come at the expense of somebody else.” If revenue was growing more, he said, firms would not have to gain market share from other firms.

As for revenue, New York law firms saw an average rise of 4.2 percent compared with the national average of 2.5 percent.

Additionally, New York firms saw the highest growth in demand for legal services, at 1.2 percent, compared with other regions—demand industry-wide dropped 0.4 percent.

But the growth in demand last year for New York firms, driven largely by transactional work, was not back to pre-2008 levels, DiPietro said.

“It’s good news that has to be tempered,” he said. “We’re not suggesting we’re returning to the golden age of profitability.”

DiPietro said the revenue and demand growth for New York firms was the result of more confidence in the economy, a rise in deal work and a pick up in regulatory work as companies look to implement Dodd-Frank, which favors New York firms with Washington, D.C., practices.

In particular, DiPietro said large and mid-market mergers and acquisitions last year contributed to the demand. He said transactional work increased in third quarter 2013 and firms are reporting that relatively high demand is continuing into 2014.

Among New York firms, year-end inventory—a combination of bills already sent and work in progress not yet billed—was up 1.7 percent compared with 2012, lower than the industry’s 2.4 increase, according to the Citi survey. This is one predictor of revenue in early 2014, DiPietro said.

Overall, he said, New York will remain a focus for capital markets and transactional work, but firms are looking to other cities now, such as London, Beijing and Hong Kong, for their growth.

“It’s safe to say that if you look at growth of firms headquartered in New York, that growth has not been in New York. It’s been in other parts of the U.S. and globally,” DiPietro said. “It’s a recognition that there are other cities that are emerging. New York has historically been the 800 pound gorilla and it’s probably the 600 pound gorilla [now].”

Among all firms in Citi’s survey, firms with a greater international presence outperformed others. “The more U.S.-centric firms, on the other hand, saw declining demand, deepening excess capacity and declining margins,” Citi said.