Pennsylvania law firms held their own amid the national landscape when it came to their financial showing in 2012. And that meant a higher-than-expected rise in revenue and profits along with a growing spread between the strongest and weakest firms, according to a flash survey done by Wells Fargo’s Legal Specialty Group.
Nationally, gross revenue rose 5 percent on average in 2012, while net income rose 6 percent and profits per equity partner (PPP) increased 5 percent. These results, collected from more than 100 firms, were a surprise to the people at Wells Fargo who saw a much weaker showing from firms when it conducted its nine-month survey.
"I think that we were pleasantly surprised with the 2012 year-end results because, when we looked at the nine-month numbers, it seemed that any revenue gain was being offset by expense growth," said Mary Ashenbrenner, head of Wells Fargo’s legal practices group in Pennsylvania.
Ashenbrenner attributed the gains in the fourth quarter to "tremendous collection efforts." Jeff Grossman, managing director of Wells Fargo Private Bank’s Legal Specialty Group, also told Legal affiliate The American Lawyer that the fourth quarter brought in a flurry of business activity as companies looked to reap certain tax benefits that expired at year’s end.
Ashenbrenner said she was also pleased to see Pennsylvania firms were right in line with their national counterparts on the financial increases considering that, in the past, the state has lagged in those metrics.
Just as the national firms saw wide spreads in terms of increases and decreases in revenue, net income and PPP, Pennsylvania firms were also across the board. Ashenbrenner said the real story will be told when looking at the individual movement in the averages when Wells Fargo does its more complete survey of 2012′s numbers, expected out in March. The bank does not publicly provide data on individual firms.
According to The American Lawyer, the best-performing firm among those surveyed nationally saw its gross revenue rise 23 percent, with the worst-performing firm’s revenue falling 6.5 percent. On the net income front, one firm saw a 30 percent rise, while the firm with the poorest performance in that category suffered an 18 percent decline.
Am Law Second Hundred firms performed slightly better than their Am Law 100 counterparts last year, the Wells Fargo survey found, with firms in the former category seeing revenue increase 6.3 percent on average versus 4.5 percent for Am Law 100 firms and enjoying net profit increases of 6.5 percent on average compared to 5.5 percent among the Am Law 100, The American Lawyer reported.
Ashenbrenner noted that Wells Fargo is urging firms to be cautious in 2013. The bank is predicting a 4 percent growth in revenue and net income nationally. She said demand for legal services has still not picked up to pre-recession levels, forcing the most successful firms to continue to look at expenses.
"The strongest law firms, which are not necessarily the largest law firms, are not taking their foot off the pedal," Ashenbrenner said.
She said those firms continue to have a laser-like focus on things such as rightsizing staff and attorneys as well as re-examining real estate expenses.
While firms have been cutting expenses since the recession started, there is still more work that can be done. Ashenbrenner said firms have taken a "layered approach" to expense reduction because many thought the recession would only last the typical 18 months or so. Cuts started with staff, and then as the recession continued and demand remained down, firms moved to associates.
"Now firms are really paying particular attention to partner ranks," Ashenbrenner said.
She said firms aren’t necessarily de-equitizing partners, though some have. The focus has really turned to what the responsibilities of an equity partner are in the "new normal" of the business of law. Partners can no longer just focus on billable hours, but also have to be very good at sales and business development, Ashenbrenner said. They also have to demonstrate a particular niche with clients, she said.
This redefining of an equity partner’s role will mean some partners will be de-equitized, others will choose to embrace the business component and others still may find it time to find a new job, Ashenbrenner said.
"I think the days are gone where clients went to a particular law firm just because of that law firm," Ashenbrenner said. "They are looking for expertise and law firms need to be able to demonstrate expertise in a specific practice area."
Moving further into 2013, Pennsylvania law firms must continue to have a keen focus on improving productivity, improving realization rates and keeping a very close watch on both real estate and other expense items, Ashenbrenner said.