Pennsylvania’s law firms had the largest rise in head count and the greatest decline in productivity in the second quarter of 2014, according to a national survey conducted by Citi Private Bank Law Firm Group.
Head count rose an average of 2.1 percent across the 12 Pennsylvania firms that participated in the bank’s quarterly flash survey looking at the financial performance of law firms in the first half of 2014.
Those firms seem to be heeding consultants’ warnings, however, when it comes to growing equity partner ranks. The state’s firms grew their equity partner tier by just 0.4 percent, according to the survey.
The Pennsylvania lateral market has not been particularly robust this year, but Lisa Kohut, a director with Citi Private Bank Law Firm Group in Philadelphia, said much of the growth in overall head count could be occurring outside of Pennsylvania as area firms look to expand into new markets or grow existing locations.
The growth has been in nonequity partners and mid- to senior-level associates, she said.
Hiring all of those attorneys has put a strain on Pennsylvania law firm expenses, productivity and overall demand. But it has caused overall inventory to see a rise.
Pennsylvania saw the greatest decline of any of the regions surveyed when it came to productivity, or the hours logged per attorney. Area firms saw an average decline of 1.4 percent. Kohut said that was largely due to the increase in attorney head count along with modest demand growth.
Demand, or the total hours logged at Pennsylvania firms, rose just 0.3 percent, which was eighth out of the eight regions that saw rises in that metric. The overall industry average was a rise of 0.9 percent, according to the survey.
While it may seem problematic that overall hours logged rose at such a slower rate than attorney head count, Kohut noted it takes time for attorneys to ramp up billings when they first join a firm. That may explain the 4.3 percent rise in total inventory, which was slightly higher than the national average of a 4.1 percent increase in inventory. Pennsylvania firms ranked fourth out of the 10 regions that experienced growth in inventory, according to the survey.
Pennsylvania firms had the second largest increase in expenses of all the regions surveyed, with a 4.2 percent increase in expenses in the first half of the year. That was about double the industry average for expense growth, Kohut said.
Head count growth, compensation increases and office space expansion were all factors that drove Pennsylvania firms’ rise in expenses, she said.
Revenue is moving in a positive direction for Pennsylvania firms, which saw an average 4.7 percent increase in the metric. That was seventh out of 11 regions when it came to tracking revenue growth and slightly greater than the industry average of 4.4 percent, according to the survey.
One area where Pennsylvania firms still have room to grow is in attorney hourly rates, Kohut said. Area firms raised rates an average of 2.5 percent, which was the second smallest growth in rates of all of the regions Citi surveyed. On average, the industry rose rates 4.4 percent, Kohut said.
While Pennsylvania firms have leveraged the value-add they provide by selling clients on quality lawyers with lower rates than some larger markets, Kohut said a lot of times it isn’t the client pushing back on rates, but the attorneys pushing back on increasing their rates. Many times, the clients end up being OK with a reasonable rate increase, she said.
On the whole, Citi continues to project single-digit increases for the full year of 2014 when it comes to revenue, Kohut said.