market trends 2013

While a return to the legal industry’s pre-2008 halcyon days remains out of reach, law firms should expect to see the modest positive momentum they experienced in the second half of last year extend into 2014, according to a report produced by Citi Private Bank’s Law Firm Group and Hildebrandt Consulting.

The nine-page client advisory [PDF], which is to be released Monday, notes that though growth in demand for legal services was down 0.6 percent at the end of 2013′s third quarter, that figure actually represented an improvement compared to how the industry fared in the year’s first half. The advisory’s authors also cite the 2.7 percent growth in revenue across the industry through the year’s first three quarters—which they link in part to modest rate increases—as proof that 2013 ended with positive momentum.

The advisory draws from Citi’s Law Watch database, which includes survey results from, among others, 84 Am Law 100 firms and 54 Second Hundred firms, and from Thomson Reuters’ Peer Monitor Index, which includes data from 53 Am Law 100 firms and 37 Second Hundred firms. It does not contain fourth-quarter data.

The advisory predicts that last year’s moderate growth in demand for legal services is likely to continue in 2014, especially if an expected uptick in global economic activity spurs an increase in transactions. The authors specifically anticipate that firms will see rising demand in their energy, regulatory and real estate practices.

At the same time, the authors caution— as they did at this time last year—that demand for legal services is unlikely to ever return to the levels seen before the recession. The advisory notes that after declining sharply in the wake of the fiscal crisis, demand has trudged along at a roughly flat rate ever since, rising just 1.1 percent between 2010 and 2011 and then dropping 0.2 percent the following year.

Citing these figures, the advisory warns that the changes in demand are not cyclical and that the industry has experienced “a fundamental shift in the market for legal services, resulting in a changed and more muted demand environment for law firms.”

And though firms have spent the past six years trimming head counts, paring expenses and offering clients discounts, the authors say they will continue to strain to create healthy profit margins. By now, the advisory states, firms must tailor their expectations for only “modest demand growth” and sharpen their focus on pursuing at least one of three strategies for increasing revenue: organic growth, lateral acquisitions and law firm mergers.

Firms are being more careful with their partner promotion plans, the advisory says, while taking pains to enforce performance expectations for their current equity partners. After growth in equity partnership ranks dropped between 2009 and 2011, the report shows, the number of equity partners rose 0.5 percent in 2011. Meanwhile, as The Am Law Daily reported earlier this week, last year was a record year for law firm mergers in the United States, according to legal consultancy Altman Weil. The Citi-Hildebrandt advisory predicts that the merger trend will spill into this year, especially as already strong firms move to improve their depth by combining with firms that may be struggling in some regards.

The advisory’s authors say 2013 was, for the most part, on par with other postrecession years, but that the slight uptick in revenue and demand growth to close out the year holds promise for 2014. They predict that law firm profits will grow by roughly 5 percent this year as demand continues to increase and firms continue to keep their head counts at conservative levels. Additional modest rate increases should also continue to drive moderate revenue growth. And while the legal profession may never return to its boom years, the advisory’s authors are optimistic that moderate growth should at least create more balance between supply and demand in the industry.