The improved financial outlook and predicted end to staff and lawyer layoffs reported by managing partners across Pennsylvania in 2011 look to have ended as quickly as they appeared.

In The Legal‘s 17th annual Managing Partners Survey conducted in the summer of 2012 for PaLaw magazine, fewer law firm leaders across the state were able to show gains in revenue and profits, and more predicted this year than last that they would be forced to either lay off attorneys or staff or de-equitize partners in the coming year.

After bleak years during the recession, 2011 seemed to bring brighter days and managing partners were optimistic looking into 2012. But the economy proved difficult to tangle with for many firms that saw a slowdown in demand at the end of 2011 and into 2012. Political and economic uncertainty in markets across the globe coupled with a continuing slowness in demand growth has caused some firms to look for ways to combat the fact that revenue is increasingly elusive.

Though still only a minority, more firms said this year that they would have to look to layoffs of attorneys at all levels, as well as staff layoffs and de-equitizations. And fewer firms plan to grow by more than 10 percent in the coming year.

BEYOND THE BORDERS

Growth in terms of headcount when comparing the pre-recession era to 2012 has not been found in Pennsylvania.

The firms toward the top of The Legal‘s list of the 100 largest in the state are often the same year over year, with the same usual suspects jockeying for the top three spots. What it takes to make it to the top of the list in terms of full-time attorney headcount in Pennsylvania, however, has gone down in the past five years.

In 2007, before the recession took hold, Pepper Hamilton was at the top of our chart with 323 full-time lawyers in Pennsylvania. In 2012, Reed Smith ranks first (the third year in a row) with 312 lawyers in Pennsylvania.

The 100 largest law firms in Pennsylvania in 2007 employed 8,302 full-time attorneys in the state, while the 100 largest firms in 2012 employed 7,873, a nearly 6 percent drop.

When making a similar comparison of those firms’ worldwide attorney headcount in 2007 and 2012, however, firms went in the opposite direction, growing 7.9 percent. The 100 firms on The Legal‘s 2007 list employed 25,177 lawyers. While not an exact comparison of the same firms, the 100 largest Pennsylvania firms in 2012 employed 27,173 attorneys.

Much of that growth was driven by Am Law 200 firms that grew significantly over the past five years, often through large-scale mergers. The growth was focused in markets outside of Pennsylvania, with many firms viewing their Pennsylvania offices as mature and the demand for work in the state stagnant in most segments with the exception of perhaps the energy sector.

The decline in Pennsylvania numbers would appear to indicate that firms, particularly those headquartered in Pennsylvania, focused their layoffs during the recession in-state. The numbers could also indicate that firms did not look to fill vacant positions in Pennsylvania, whether they were caused by layoffs or just natural attrition.

GROWTH AND CUTS

In 2011, 9.7 percent of survey respondents said they grew significantly (more than 10 percent) in the previous year, while only 3.1 percent said the same this year. And while no firms said in 2011 that they had shrunk by more than 10 percent in the prior year, 6.3 percent of this year’s respondents said they had.

Respondents that shrunk less than 10 percent totaled 16.1 percent in 2011 and 15.6 percent in 2012. The bulk of firms grew less than 10 percent in both years  —  58 percent in 2011 and 50 percent in 2012.

Between June 2012 and June 2013, 65.6 percent of law firms expect to grow less than 10 percent. But, as was shown last year, 64.5 percent expected to grow by that much and only 50 percent actually did. While 16.1 percent of firms said in 2011 that they would grow more than 10 percent in the coming year, only 9.4 percent said that this year.

While an overwhelming number of respondents grew or at least stayed the same size in the past year, layoffs became more prevalent. Of the respondents this year, 9.4 percent said they laid off attorneys in the past year. That is up from 3.2 percent in 2011.

The more noticeable change came when respondents were asked whether layoffs were planned for the coming year. Last year, 6.5 percent said they were planning layoffs, whereas in the coming year 18.8 percent of respondents plan to lay off attorneys. Over the years, the lawyers who were targets of layoffs have shifted from just associates to all levels of attorneys.

Staff became an even greater target for layoffs. In 2011, 12.9 percent of respondents laid off staff. In the past year, that figure rose to 21.9 percent. There was a smaller gain in the percentage of firms that felt staff layoffs were still needed in the coming year. While 6.7 percent predicted staff layoffs in 2011, 9.4 percent said they might have to cut staff in the coming year.

First-year associate hiring in 2012 was all over the place. A little more than 25 percent of respondents hired more first-years than they did in 2011, and about the same percentage hired none. The largest percentage  —  32.3 percent  —  hired the same number of associates as they had in 2011 and 16.1 percent hired fewer first-years.

The use of contract or temp attorneys grew rather significantly year over year. Nearly 47 percent of respondents said they hired contract lawyers in 2012, which was up from 38.7 percent last year. And of those that did hire contract lawyers, 81.3 percent hired more than they had in the previous year, a figure that jumped from 46.2 percent in 2011.

The use of staff associates, who are full-time but not on a partner track, actually declined in 2012. This year, 40.6 percent of respondents employed such a track in their firm, whereas 45.2 percent had done so in 2011.

MERGERS AND EXPANSIONS

Law firm mergers haven’t picked up since the recession took hold, and they continued to slow down in 2012. In our 2010 survey, 25 percent of respondents had completed a merger in the previous year. In 2011, that number dropped to 16.1 percent. In 2012, the figure fell to just 6.3 percent.

The number of firms interested in merging in the next year has also dropped. While the majority of law firms  —  about 58 percent  —  are open to merger opportunities, those actively seeking a merger fell from 16.7 percent to 6.5 percent. Those firms not interested in a merger grew from 30 percent to 35.5 percent.

If firms were to merge in the coming year, their interest in markets in Pennsylvania and other East Coast cities has waned in favor of markets beyond the East Coast. And while 20 percent of 2011′s respondents were open to mergers in foreign countries, none of this year’s respondents answered so.

A number of Pennsylvania firms did open in foreign countries in 2012. Many picked up lawyers from the disbanding Dewey & LeBoeuf and grew in places like London or opened in places like Almaty, Kazakhstan, or Moscow.

New offices aren’t on many responding firms’ radar screens in the coming year. The number of firms that had opened in new locations in 2012 fell to 21.9 percent from 25.8 percent in 2011. Firms that opened up new locations looked to places like Houston, Almaty, New York, Pittsburgh and Wilmington, Del.

Looking ahead, only 6.3 percent of respondents are thinking about opening in new markets in the coming year, compared to 20 percent who said the same last year.

THE FINANCIAL PICTURE

The majority of law firms were able to show improvements in revenue and profits when comparing their two most recent fiscal years, but the percentage that could show increases in those metrics dropped from last year.

In 2012, about 62 percent of firms saw increases in revenue, while 10.3 percent saw declines and 27.6 percent held revenue steady year over year. In 2011, 70 percent of respondents increased gross revenue and only 6.7 percent saw decreases.

Firms that saw increases in revenue per lawyer dropped from 70 percent in 2011 to 60 percent in 2012. And in a bright spot for firms, only 50 percent saw costs increase as opposed to the 55 percent who said the same last year.

A slightly better cost climate wasn’t enough to hold profits at the high figures seen last year.

In 2011, about 76 percent of firms were able to raise net profits, whereas only 58.6 percent were able to do so this year. The percentage of firms that saw net profits decline rose from 3.4 percent in 2011 to 17.2 percent in 2012.

Profits per partner saw similar declines. While 72.4 percent of firms in 2011 saw increases in profits per partner, only 58.6 percent could say the same this year. The number of firms that saw decreases in partner profits rose from 3.4 percent in 2011 to 20.7 percent in 2012.

When asked what firms did in the last year to retain profitability levels, the biggest tactics were increasing rates, switching their focus to higher-demand practice areas and reducing the number of equity partners.

Not as many firms raised rates in 2012, however, as they did in 2011. This year, 65.4 percent of respondents raised rates, whereas 73.9 percent had done so in 2011.

The percentage of firms that resorted to reducing their equity partner ranks rose from 8.7 percent in 2011 to 26.9 percent in 2012.

Consultants have said for the past few years that the only real way firms would be able to continue to cut costs and improve profitability would be to get rid of partners who weren’t pulling their weight. It appears this may be starting to happen.

The number of firms that said they de-equitized partners in the last year rose only slightly from 23.3 percent to 26.7 percent. But the number that plan on de-equitizing partners in the next year rose from 13.8 percent to 23.3 percent. While most respondents said de-equitizations would affect between 1 percent and 3 percent of their partnerships, one firm on the anonymous survey said between 15 percent and 30 percent of its partnership might be affected.

How firms pay their attorneys has shifted since the recession, with associates most affected as firms moved away from lockstep compensation to competency-based models. Firms are beginning to look more closely at how partners are paid, as well.

In 2011, 3.2 percent of respondents said they were planning on changing compensation models for partners, while 12.5 percent said the same in 2012. Another 12.5 percent of this year’s respondents said they would change compensation models for both partners and associates. While 90.3 percent of respondents in 2011 said they weren’t changing anything, only 68.8 percent said so this year.

While 34.6 percent of 2011 respondents increased starting salary for first-year associates, only 21.4 percent did so this year. The majority of last year’s respondents felt first-years were fairly compensated, but in 2012, 51.6 percent said first-years were overpaid. And one respondent decreased first-year associate salaries at the firm.

For the first time, we asked firms whether they were able to charge clients for work done by first- or second-year associates. More than 62 percent said they were always able to charge for that work and nearly 38 percent said they sometimes were able to charge for work by junior associates. No one said they were never able to charge for first- and second-year associates.

MARKETING

The number of firms with marketing directors and marketing partners both declined.

While 67.7 percent of firms had a chief marketing officer or similar position last year, 62.5 percent had such a position this year. The percentage of firms that have a marketing partner continues to decline, dropping from 58 percent last year to 50 percent this year. That figure was at 70.4 percent in 2010.

More firms, however, are devoting resources to marketing. Nearly 91 percent of respondents had marketing budgets in 2012, compared to nearly 81 percent who did in 2011. In both years, those budgets ranged between 1 percent and 10 percent of a firm’s expenses.

Managing partners were asked to rank marketing tools on their effectiveness, with 1 being the most effective and 12 being the least effective. Firm websites received the highest number of votes for being the most effective, but that only came in at 15.6 percent.

Entertaining and social events were ranked first by 12.5 percent of managing partners and 10.7 percent of firm leaders said client surveys were the most effective marketing tool. The least effective tool, firm leaders said, was cold calling.

THE CLIENTS

It seems that law firms are following the advice of consultants who have long suggested firms use client surveys and long lamented the small number that actually do.

The number of Pennsylvania firms that employ client survey tools has steadily risen in the past few years. In 2010, 18.5 percent of firms said they used client satisfaction surveys. In 2011, that number rose to 35.5 percent and in 2012, it was at 43.8 percent. The bulk of firms  —  66.7 percent  —  survey their clients annually.

Fewer firms were able to report that clients were regularly paying their bills without raising any concerns. In 2011, 25.8 percent of respondents said clients paid without much hassle, whereas only 13.8 percent said the same this year. Rather, 86.7 percent of firms said this year that their clients sometimes asked for reductions.

And despite the continuous talk of alternative fee arrangements, it appears clients at nearly 52 percent of firms still prefer hourly billing. When clients do agree to AFAs, they are open to a wider range of fee structures. Last year, 84 percent of respondents said clients preferred paying a flat fee for AFA-based projects. Now clients are also more open to task-based billing and projects done on a fixed fee along with an outcome-based bonus.

OTHER SURVEY TAKEAWAYS

When asked what practice areas had the most potential for growth in the coming year, 54.8 percent of respondents said intellectual property  —  a huge jump from the 29 percent who said the same in 2011. Commercial litigation was also a hot practice area, respondents said. Once again, real estate was the most cited practice area for potential decreases in growth.

Fewer firms had fully funded pension plans this year. In 2011, 68 percent of firms had fully funded plans for attorneys, whereas this year that number fell to 53.3 percent. Several firms have partially funded plans and a nearly equal number pay pensions out of current cash flow.

The percentage of firms with mandatory retirement policies rose from 25.8 percent to 41.9 percent.

The number of firms with leadership succession plans in place  —  an issue consultants have told The Legal firms are struggling with  —  has fallen from 55.2 percent to 51.6 percent.

More firms are providing leadership and business development training for lawyers.

Firms that were able to meet the American Bar Association’s recommendation of 50 pro bono hours a year per attorney rose in 2012 to 40 percent from 26.7 percent last year.

Each year, we ask managing partners whether they find their jobs more or less enjoyable than 10 years ago. In 2011, 35.5 percent said the job was less enjoyable, while 40.6 percent said so this year. Half of the respondents find the job equally as enjoyable as it was 10 years ago.

ABOUT THE RESPONDENTS

The Managing Partners Survey is sent out to leaders of the 100 largest law firms in Pennsylvania and some that are close to being on the list.

We had 33 respondents this year, with 43.3 percent at firms with more than 125 lawyers. The remaining respondents were fairly evenly split between firms of 11-25 lawyers, 26-50 lawyers, 51-80 lawyers and 81-125 lawyers.

A little more than 55 percent of respondents were at Philadelphia-based firms and 20.7 percent were in Pittsburgh. More than 70 percent of respondents considered themselves full-service firms, 20.7 percent were at firms with limited practice areas and nearly 7 percent were boutiques.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.