Back in May, Citi Private Bank’s law firm group reported an extremely strong first quarter—and suggested that the industry could expect the pistons to keep firing into the next quarter.
Well, the first second quarter results are in, via Thomson Reuters’ Peer Monitor, and they don’t look good: Law firms were “blindsided,” Peer Monitor said, by a drop in demand across nearly all practices. The 0.9 percent decline breaks a streak of nine consecutive quarters of increased demand, the longest such streak since the 2008-9 financial crisis, Peer Montitor said.
The softer market affected the bottom half of The Am Law 200 the most, the researchers found, with demand down 1.8 percent this quarter and down 1 percent so far this year. Demand at Am Law 100 firms also fell, but by less: The group was down 1 percent this quarter and 0.2 percent in 2016. Midsized firms surveyed were largely unaffected.
(Demand is defined as growth in billable hours; the index collects data from 151 U.S.-based firms, including 53 Am Law 100 firms, 42 Am Law 200 firms and 56 midsized firms, defined as firms with 200-plus attorneys that are not part of The Am Law 200.)
The results signal a sharp change. In Citi’s first-quarter report, for example, revenue ticked up 5.8 percent, driven by a 1.8 percent increase in demand, a 3.2 percent increase in billing rates and a shortened collection cycle. That rate of increase, Citi noted, had not been seen since before the financial crisis. (Citi and Wells Fargo Private Bank’s legal specialty group have second-quarter reports coming out next week; both declined to comment.)
There were inklings, however, that the upbeat first-quarter results could be misleading. Wells Fargo’s year-end report in January found that total hours were up just 0.5 percent in 2015, and 42 percent of firms reported a decline in demand. Wells Fargo’s lead analyst said the only certainty was continuing volatility.
Drilling down into specific practice areas, Peer Monitor reported that corporate work was flat this quarter, though up 5 percent so far this year over the first six months of 2015. Litigation softened by 1.8 percent this quarter, its biggest drop since early 2013. For the first six months, demand for litigation was 1.1 percent below the same period last year, the survey showed. Real estate and tax practices were likewise in negative territory compared with 2015.
Productivity slowed 2.8 percent in the second quarter, the biggest drop in more than three years, due to “a double-whammy in the second quarter from falling demand and rising head count,” Peer Monitor said.
Expenses, meanwhile, are on a rebound. Direct expense growth, prompted by the fastest attorney hiring in four years, has doubled over the last two quarters, the report found. (A July bump in associate salaries at most Am Law 100 firms indicates that firms aren’t likely to slow spending anytime soon.) Meanwhile, overhead increased at its fastest rate since 2008 due to spending on staff compensation and technology.
“Firms have been consistently growing head count for a considerable period of time beyond what is justified by demand, and that gap is now growing wider,” the authors concluded.
There was one bright spot: Rates ticked up 2.8 percent this half, compared with 2.7 percent for all of 2015.