Increasing demand and a more concentrated focus on the efficient delivery of legal services should lead to higher profits in 2014, according to a survey of the managing partners’ confidence in the market.
Citi Private Bank’s Managing Partner Confidence Index for the fourth quarter of 2013 showed an improvement of six index points when it comes to overall confidence in the market. Citi gave an index value of 109 for overall confidence, with 100 being considered neutral, anything above that considered confident and anything below 100 showing a lack of confidence.
While firms are still waiting on last-minute collections to see how 2013 will end up, Citi senior client adviser Gretta Rusanow said the survey provides a picture of how managing partners view 2014 given it asks firm leaders how they anticipate certain metrics will fare over the next six months.
Demand saw the largest increase in index points, growing 17 points to a score of 136 on the confidence index. While confidence improved from the third quarter, expected demand increases are still tepid. The bulk of respondents—44 percent—felt that rise in demand would be less than or equal to 3 percent. Of the 71 respondents to the survey, 23 percent said demand would grow more than 3 percent, 21 percent said it would remain unchanged, 8 percent predicted a decrease of 3 percent or less and 4 percent projected demand to fall at a rate of more than 3 percent.
With slow demand growth at best, Rusanow cautioned firms to be careful with expense management. Only about 10 percent of respondents said expenses would decrease in any capacity in the next six months and another 26.8 percent said they would remain unchanged. The majority, or nearly 48 percent, said expenses would grow less than 5 percent.
The managing partners painted a slightly different picture when it comes to profits and revenues, though both increased by 10 index points to 96 and 107, respectively. For both categories, 10 percent of the respondents predicted decreases. For profits, 15 percent said they would remain unchanged and 6 percent said revenues would be unchanged. Approximately 50 percent of respondents predicted growth in both revenues and profits would be below 5 percent.
Rusanow pointed out it is the improved efficiencies, both from expense and project management, that will make up for the demand pressures and result in increased profits for 2014.
“It’s a challenging legal environment but I think law firms are doing a better job of anticipating those challenges,” Cozen O’Connor CEO Michael Heller said. “You have to now understand that you have to operate within a slow-growth economy and a challenging demand for legal services. It’s better than a bad economy and a challenging demand for legal services.”
Heller said his firm collects about 17 percent of its annual revenue in December. While he can’t know for sure until next month how 2013 will go, he said he is cautiously optimistic. Heller said he expects 2014 to be much of the same.
When it comes to profits, Heller said he would expect most firms’ profits to be stable or up a few percentage points in 2014 “because I think law firms have been anticipating over the past year-and-a-half to two years this reduction [in demand growth] and have made meaningful changes to operations.”
While Heller said his focus is on revenue growth given expenses can only be cut so much, he said clients are forcing firms to engage in project management given their demands for more efficient delivery of legal services.
Buchanan Ingersoll & Rooney CEO Jack Barbour said he is confident his firm will meet its aggressive budget for 2013.
“I’m not wildly optimistic about 2014 but I think it will be mildly better,” he said.
Barbour said he expects energy work to particularly remain strong for the firm, with the only practice not expected to grow being bankruptcy. He said the firm continues to remain more efficient with less space and less staff.
“I think everyone has accepted the paradigm shift that while revenue is still of primary importance, revenue is not the answer to everything and efficiency is much more a factor than what it was pre-2008,” Barbour said.
Fox Rothschild managing partner Mark Silow said he would agree with the survey results that things are generally improving on the demand side and that firms have become better in the last five or so years at managing expenses. But demand growth, Silow said, is proving to be a region-by-region phenomenon.
“I’m not sure that the increase in demand is as much located in the Philadelphia region as it may be in other regions,” Silow said. “But I don’t think Philadelphia has slowed down, I just think other parts of the country are doing better.”
Silow said his firm is seeing increased business in New York, Southern Florida and California.
For Eckert Seamans Cherin & Mellott, 2013 was an investment year with acquisitions or new offices in Boston; Trenton and Newark, N.J.; Philadelphia; and Pittsburgh. CEO Timothy Ryan said that impacted the 2013 numbers, as did a flatter-than-anticipated year for the corporate and real estate departments.
“Assuming collections are tracking, we will end 2013 fine, particularly in light of the growth,” Ryan said. “We were more optimistic that the business side would be stronger than we experienced.”
Ryan said he is confident 2014 will be even better, though he wouldn’t expect demand to rise more than 10 percent. He said he is careful to be too optimistic, however, when it comes to a rebound in the middle-market transaction and real estate work. Ryan said increases in hours per lawyer, rather than rate increases, is how he expects to see revenue grow in 2014.
Another positive sign for profit growth is that the confidence index for discounting rates has remained unchanged from the third to fourth quarter, which Rusanow said means the pressure to discount rates, while still prevalent, is stabilizing. Nearly half of the respondents said rate discounting will remain unchanged while an equal 49 percent said it would increase modestly, according to the survey.
There is more firms can be doing to manage expenses, Rusanow said. She pointed to the rise in nonequity attorneys. More firms than last quarter are expecting to see a rise in that tier of attorneys, which Rusanow said includes non-partner track associates, income partners and counsel. Associates, whose numbers are also expected to increase, are not included in the nonequity category.
Rusanow said the rise of the nonequity group would be a good thing if it included only the lower-cost staff associates. She said the productivity numbers for those more senior nonequity and counsel attorneys falls short of associates.
“Their productivity lags associates and their profitability, the contribution per lawyer number, can often be low or negative,” Rusanow said.
Firms could look to trim that category, she said. Rusanow also predicted a continued effort to trim staff headcount. The confidence index shows firms are starting to look at trimming the partner ranks. Confidence levels in equity partner hiring fell three index points to 112, according to the survey, with 24 percent of respondents reporting they expected a decrease of less than 3 percent in their equity partner ranks and another 38 percent predicting that tier will remain stable. But while no respondents predicted a decrease of more than 3 percent, 10 percent of respondents expected the equity tier to grow by more than 3 percent, according to the survey.
Confidence in the economy at large increased by four index points to 116. The majority, or 57 percent, of respondents said they expected the economy to remain the same over the next six months with 35 percent predicting it would get somewhat better. Seven percent said things would get somewhat worse and 1 percent said the economy would get considerably better.
Confidence in the business conditions of the legal profession were slightly different. The majority, or 61 percent, predicted things will stay the same, while 23 percent said the legal business will get somewhat better and 1 percent said it would get considerably better. On the other hand, 15 percent said the legal business would get somewhat worse, according to the survey.