The legal industry has experienced revenue growth through the first three quarters of 2018, as demand and billing rates grew at a level that outpaced an increase in expenses and created a wider profit margin for many firms, according to a new survey from Citi Private Bank’s Law Firm Group.
Citi Private Bank on Wednesday released high-level results and takeaways from a law firm advisory services 9-month flash survey that painted a largely positive picture of the legal industry’s business results so far this year. The survey drew on participation from 190 law firms of varying size—44 Am Law 50 firms; 35 Am Law 51-100 firms; 51 Am Law Second Hundred firms; and 60 others—a group that includes boutique and niche firms.
Across the legal sector, Citi reported revenue growth through the first three quarters of 2018, attributing that to a combination of higher billing rates and demand growth. But the bank also noted that revenue growth was “tempered” by a slow cycle of law firm collections.
David Altuna, client advisor and senior vice president of Citi Private Bank’s Law Firm Group, said in an interview on Wednesday that the legal industry is still in a period of modest growth, particularly when compared to conditions that prevailed prior to the recession of a decade ago. But the demand increases in 2018 are a positive sign, he added.
“Here we are in 2018 and we have demand growth of 2.5 percent at the 9-month point,” he said. “That’s a really healthy story.”
The survey also looked at expenses, which Citi said have increased this year as well, driven in larger part by higher compensation compared with increases in operating costs. Expanding on those findings, Altuna said raises for associates this year have contributed to an acceleration in compensation increases.
While expenses grew, they did so at a lesser rate than the revenue growth, a dynamic that has created a widened profit margin on average across the industry, according to Citi. But there’s more to the story when looking at firms of different sizes. Altuna said the top 50 Am Law firms have borne a higher expense burden in light of associate pay increases, compared with other smaller firms.
“What we’re seeing in 2018 is more expense pressure than we might expect in a year of top-line growth,” said Altuna. “It’s showing you the pressure that adds when you raise comp across the associate scale.”
But at the same time, he added, those top-earning firms have had an outsized impact on revenue growth in the legal industry as a whole, a dynamic that offers some offsetting to the expense pressure from increased lawyer compensation. The Am Law Second Hundred, meanwhile, has seen less robust revenue growth and are still feeling pressure from operating expenses.
“In a lot of these results, you’re seeing a lot of dispersion across market sectors,” said Altuna. “The revenue story is being driven disproportionately by the Am Law 50.”
The Citi survey also showed positive signs for the rest of the year. Specifically, the bank reported that inventory has grown at law firms, primarily due to increases in unbilled time but also due to increases in accounts receivable. Altuna described the inventory results as a “tailwind” that builds on strong economic markers in other areas. And, he said, the increase in inventory should lead to a strong collection season this year.
“We do expect firms to collect on most of that,” said Altuna. “We’ve heard from firms that they’re very focused on collections this year.”
Citi’s positive survey results come on the heels of a Thomson Reuters Peer Monitor Index third quarter report that showed demand in the legal industry had reached a post-recession high.
The third quarter surveys from both Citi and Thomson Reuters also build on signs from earlier this year that pointed toward strong financials in the legal industry. In a half-year review issued in August, Citi said that the first half of the year saw the industry increase revenue by 5.5 percent, the highest such increase since 2007.
That revenue growth has since accelerated to 6.3 percent through the first three quarters of 2018, according to Citi’s latest survey.