Law firms saw anemic growth in the first half of 2013, with minimal gains in gross revenue stemming from higher billing rates rather than more work coming in the door, according to a survey released this week from Wells Fargo Private Bank's Legal Specialty Group.
The bank polled 120 firms—half in The Am Law 100, and the rest regional firms or those falling in the Am Law Second Hundred—to see how they fared from January to June compared with the same period in 2012. On average, gross revenue rose 1.5 percent, the survey found, though average hours per lawyer fell 2.5 percent.
"I’m not surprised by what I see," says Jeff Grossman, the senior director of banking for the legal specialty group, who shared the results of the Wells Fargo survey Thursday with The Am Law Daily.
As has been the case for the past few years, a small number of top performers significantly outpace the averages, Grossman says. One firm in the survey reported a nearly 35 percent revenue boost in the first half of the year, he says, with the least successful firm recording revenue down almost 20 percent.
"We continue to see the stratification, where the stronger firms continue to get stronger," Grossman says, noting that about a dozen firms reported a revenue increase of 10 percent.
Blended average rates across all attorney levels are up 3.5 percent, Grossman says, which is partially a reflection of firms staffing matters with a larger proportion of senior attorneys than in the past. The staffing change comes as junior ranks slim down through smaller first-year classes, attrition, and layoffs. "Some also continue to raise rates because they just discount them [later]," he says, adding that even as rates increase, collecting on bills has become more difficult over the years.
One factor that Grossman says will likely eat into profitability by year-end is rising expenses. The survey found expenses up 3.5 percent over the first half of last year, including for capital expenditures like information technology upgrades that "can only be deferred for so long," Grossman says. Firms also have slightly more attorneys than they did a year ago, and have compensation obligations that are 2.5 percent higher.
As part of the survey, Grossman says he asked firms if they anticipate making any "head count reductions" of equity partners, nonequity partners, or other attorneys. Firms said they are planning for very minor cuts, Grossman says: "But what I’ve learned, if firms are reporting anything, it’s a little bit of the tip of the iceberg. There aren’t wholesale changes to be made, but what we’ll continue to see is real-time management of head count to keep productivity at a reasonable level."
Grossman said he also expects firms to continue asking underproductive partners to leave. In data collected on 2012 productivity, the bank found that a third of law firm partners billed 1,400 hours or fewer last year. That compares to the average 1,600 hours each that lawyers across all seniority levels are on track to bill this year, which is still down from the 1,640-hour average hit last year.
"It's a very difficult issue to deal with," Grossman says of what he calls these chronically underperforming partners. "To me this is the biggest challenge the industry faces."
Wells Fargo also found that average capital per equity partner is up around 2 percent, to $300,000, and that firms are decreasing their reliance on debt.