The U.S. law firm industry can expect to see another year of steady growth in 2019, according to a report from Citi Private Bank’s Law Firm Group set to be released Tuesday, even if gains are likely to be concentrated at the extremes.
The report, co-authored by Hildebrandt Consulting, found that 2018 was the best year in a decade for revenue growth, but it cautioned that the benefits accrued primarily to the largest and smallest firms. A similar trend is expected for 2019.
“We know from our conversations with firms outside of the Am Law 200 that some of them have built very strong practices, particularly in high-growth areas,” said Gretta Rusanow, head of advisory services in Citi’s Law Firm Group. “There are opportunities for firms regardless of their size, and what it really comes down to is building that differentiated brand that sets them apart form other high-quality firms.”
Relying on a sampling of primarily U.S.-headquartered law firms, the report found that law firm revenues grew by an average of 6.3 percent in the first three quarters of 2018. That well exceeds a 3.6 percent growth rate from the same span of 2017. For 2019, Citi and Hildebrandt anticipate top-line growth to continue.
In a reversal from recent trends favoring transactional work, firms reported more balanced growth between their corporate and litigation practices. The report pins some of that outcome on firms’ recent effort to scale back their litigation capabilities in response to slackening demand.
“Perhaps as firms right size their litigation practices, they’re now reaping the benefits of that,” Rusanow said.
While the 2018 results and 2019 expectations for firms in the Am Law 50 and smaller niche firms look rosy, the outlook is cloudier for firms in the middle. Brad Hildebrandt of Hildebrandt Consulting said that many of the players in this category are struggling to deal with increased costs, both from rising associate salaries and increased competition for lateral hires.
“That puts a lot of pressure on midsized firms,” he said.
As a consequence, the report anticipates accelerated consolidation in this market sector in 2019. That’s likely to take the form of both larger firms acquiring mid-sized firms and also mid-sized firms finding merger partners. The current year is already shaping up to be the busiest year for mergers on the record, eclipsing 2017.
For the second year in a row, the Citi report warned about the effects of a likely increase in partner retirements in coming years. Mandatory retirement policies and earlier retirement programs give law firms the ability to demonstrate to associates that the door to equity partnership is open, the report asserts.
But the anticipated departure of scores of partners also raises the prospect of financial challenges caused by potential capital shortfalls and client retention. Of these two concerns, Hildebrandt argues the latter is more significant. He pointed to a recent discussion he participated in where firm leaders discussed succession plans for partners who were 64 and 65 years old.
“You’re way too late,” Hildebrandt said. “You need to think about that earlier on: how to institutionalize these clients so you’re not going to lose them when partners retire.”
The report also took a close look at “price elasticity of demand” in the law firm industry between 2010 and 2017. By parceling out firms that had increased their rates most significantly and firms that had seen demand jump most significantly over that interval, the report found that the former were not suffering from declining the demand, and the latter’s growth was not a result of undercutting their competitors on pricing.
“What the study concludes is that clients are prepared to pay for value, and the firms who have built those strong brands in the market have been able to charge higher rates over the past few years, proving it’s not just about price, it’s about brand,” Rusanow said.