The drumbeat of bad financial news continued for the legal industry Thursday, as yet another survey of large law firms showed demand for their services essentially flat through the first three-quarters of the year and revenue growth for 2012 likely to fall short of last year’s single-digit gains.
The Wells Fargo Private Bank Legal Specialty Group survey found that, on average, the 115 participating firms—a group that included 60 Am Law 100 firms, 40 Am Law Second Hundred firms, and 15 boutique firms—took in 3 percent more revenue during the first three quarters of the year than they did during the same nine-month period last year. Profits, meanwhile, were up just 1.5 percent. The findings were largely in line with a similar survey covering the first half of the year that Wells Fargo released in September.
Wells Fargo’s third-quarter report detected some other troubling trends, including declines in both billable hours and firmwide realization rates. Of additional concern: The surveyed firms reported that as of September 30, they were carrying balances on their lines of credit that were, on average, a third higher than they were a year ago at the same time. That, says Legal Specialty Group national managing director Jeffrey Grossman, suggests more firms than usual are relying on short-term debt to fund operations late in the year.
Grossman notes that firms could make up the slack in the fourth quarter, when between 30 and 40 percent of annual revenue is traditionally collected. With collections lagging through the first nine months, he says, the fourth-quarter push will be more important than ever for most firms. At the same time, Grossman says he does not envision firms enjoying any sudden windfalls: “We might see a slight increase in profitability as some firms work through their inventory, but I think the end of the year will be roughly the same as what we’re seeing for the first nine months.”
The Wells Fargo report, like those issued earlier this month by Citi Private Bank’s Law Firm Group and Thomson Reuters’s Hildebrandt Institute, found that in addition to seeing their revenue growth slow during the year’s first three-quarters, firms continued to grapple with rising costs. On average, the firms surveyed by Wells Fargo saw expenses rise 3.7 percent, with nonpersonnel costs jumping 5.8 percent, and salaries—the largest line item—up 2.5 percent.
The survey’s findings, Grossman says, are more encouraging for a subgroup that includes about a dozen top-tier firms with profits-per-equity partner of $2 million and above. Those firms saw revenues grow 4.9 percent through the nine months ending September 30 compared to the same period last year, while profits rose 7.9 percent. On average, overall expenses within this elite group grew by 2.9 percent.
More worrisome, Grossman says, is the survey’s suggestion that firms are having trouble keeping their lawyers busy. Based on the number of hours billed as of September 30, equity partners at the surveyed firms are projected to work an average of 1,602 hours this year, or 1.7 percent fewer than they did in 2011. Nonequity partners find themselves in similar straits: Wells Fargo’s survey estimates that they will work 1,530 hours on average this year—a 1.6 decline compared to 2011. That poses a structural problem, Grossman says, because the number of nonequity partners is growing at a time when they are being utilized the least. The nonequity tier at firms responding to the survey has increased 4 percent compared to last year. (Associates, meanwhile, are projected to put in an average of 1,768 hours this year, a 0.5 drop compared to 2011.)
Among the top-tier group, however, equity and nonequity partners are all projected to work about the same number of hours, 1,734 and 1,733, respectively, both more than 100 hours above the survey average. (Associates at top-tier firms are projected to put in 1,787 hours this year.)
On the realization front, Grossman says, rates “have continued to slip” by an average of 1.2 percent during the first three quarters of 2012 compared to same period last year. Most firms are now collecting 80–85 percent of billed work, down from the high 80s in 2008. Wells Fargo also found that work billed to clients but not yet collected is up 5 percent compared to last year. Some of the slippage in realization, Grossman says, has been caused by the deleveraging some firms have undertaken. As more junior attorneys get cut, the overall rates charged to clients tend to climb. “Clients,” he says, “are pushing back.”
One way firms may be coping with the perfect storm of slackening demand, increased expenses, and falling realization rates is by raising their fees: Billing rates were up 3.4 percent through the first nine months of the year, and two-thirds of the firms surveyed said they plan to raise billing rates between 3 and 4 percent overall next year.