(Illustration via iStock)
Confidence in the state of the legal industry remained relatively steady for law firm managing partners in the second quarter, but their outlook on revenues and the overall economy dampened from the first quarter, according to the latest survey by the Citi Private Bank Law Firm Group, released Wednesday.
Slightly increased optimism about profit growth was driven more by expectations of improved expense control than of projected revenue increases, the survey found. At the same time, there were bigger differences in projections among individual law firms, suggesting that some were doing much better financially than others.
“Behind the averages, there appears to be a widening dispersion in the confidence levels of individual law firms consistent with the financial performance of individual law firms,’’ said Gretta Rusanow, senior client adviser at Citibank.
The overall assessment of the legal industry’s mood comes from the quarterly Citi Managing Partner Confidence Index, which surveys 77 leading law firms, including 17 in the Am Law 1-50; 12 in the Am Law 51-100 and 21 in the Am Law 200; as well as 23 firms that Citi describes as niche firms. The survey also includes four law firms headquartered in the United Kingdom. It plots responses from a series of questions on a 200-point scale, with 100 being a neutral opinion and 200 representing absolute confidence.
Overall confidence in the legal industry declined ever-so-slightly in the second quarter versus the first quarter, dipping by one point to 114. The confidence level in the economy at large, however, declined four points to 119, after having risen seven points in the previous quarter.
Confidence in business conditions in the legal profession also declined a single point, to 113. Some 57 percent of respondents said conditions were the same and 36 percent said they were somewhat better. Eight percent said they were somewhat worse. No one responded that law business conditions were considerably better or considerably worse than last quarter.
Slightly increased optimism about profits was driven more by expense control than by increased revenues, Rusanow said. Confidence in profits increased two points to 103, with 42 percent of respondents saying they expect growth below 5 percent and another 32 percent anticipating growth between 5 percent and 10 percent.
Managing partner confidence in revenue growth, however, declined six points to 105. Forty-two percent of respondents said they expected revenue growth of less than 5 percent and another 26 percent said they expected revenue growth in the 5 percent to 10 percent range, which Rusanow said reflected their concerns about discounting pressure in the industry. Also, she said, while more law firms anticipated greater demand for legal services in the months ahead, there were more firms who projected a decrease in demand, reflecting widening dispersion.
About 37 percent of respondents expected demand for legal services to grow less than or equal to 3 percent, and another 24 percent expected unchanged demand while 12 percent expected a decrease of less than or equal to 3 percent. In the previous quarterly survey, 50 percent of respondents said they expected a 3 percent increase in demand and only 5 percent expected a decrease of 3 percent.
Confidence that price discounting pressure will ease declined two points to 79. A majority of managing partners said they expect discounting pressures to either remain unchanged (61 percent) or increase (37 percent.) No respondents said the expected discounting to decline.
“A drop of even two points below 100 in confidence tells me that there is still discounting pressure in the market and it is persisting,” Rusanow said. “If I had seen the number go up, I would have been happier. Last quarter we saw discounting pressure ease but now it is tightening again and that might be affecting the downward trend in terms of revenue expectations. Their revenue expectations are dampened because for every hour worked, they will generate less.”
(The Am Law Daily recently detailed the rise of client pressure for discounts and some law firm responses to them.)
The confidence index with respect to expenses also declined two points, to 118 from the previous quarter. Some 43.4 percent of respondents said they expected expenses to grow less than 5 percent.
Expectations of head-count growth for full-time equivalent equity partners represented a bright spot in the survey, with a significant increase of 12 points in the confidence index to 112. About 43 percent of managing partners expected an increase less than or equal to 3 percent in equity partner hiring, and another 33 percent expected no change. An additional 12 percent expected an increase more than 3 percent. Only 8 percent expected an increase that large in the previous quarter. A total of 12 percent expected a decrease.
Forty-three percent of managing partners also anticipate a 3 percent or less increase in hiring full-time associates and another 29 percent expect hiring to remain unchanged.