(Photo: John Disney/ALM)

Jeffrey Grossman, a senior director at Wells Fargo Private Bank, has noticed something different this summer in his meetings with executives at Am Law 200 firms.

“Panic’s too strong a word, but I definitely feel more tension and more anxiety,” he said. “One chair recently said to me, ‘Every hour of work is much harder to come by and it’s harder to produce the same dollar out of it every year that passes.’ I’m hearing that kind of thing regularly.”

First-half financial data his team collected, released to clients Wednesday, back up those concerns. Echoing reports issued earlier this month by Citigroup Inc. and Thomson Reuters’ Peer Monitor, Wells Fargo’s data show that the most profitable tier has now joined the rest of the market in seeing demand soften. Average revenue growth—3.38 percent higher than a year ago, according to Wells Fargo—is almost entirely due to billing rate hikes, not increased demand, Grossman noted. (The bank’s data pool includes 135 firms, including more than 60 from the Am Law 100 and the balance from the Am Law 200 and other large firms.)

Meanwhile, expenses are going up, including a big unbudgeted one: 12-13 percent raises for associates in July at most Am Law 100 firms, and virtually all the most profitable ones.

Grossman happened to be visiting a client at one of the most profitable Am Law 100 firms the day in June that news of the raises at Cravath, Swaine & Moore first appeared. “The COO had already calculated that raises would be a $9 million unbudgeted expense hit” on his firm, Grossman said. The bank now projects that the associate raises will cost firms between $1-2 million and $12 million, depending on head count, and as much as a 5 percent hit on profitability unless comparable expense cuts are made. That’s similar to projections by ALM Intelligence last week.

The question now, Grossman noted, is how much firms will be able to recoup via billing rate hikes and cost reductions—which could include lawyer layoffs at some firms. “This is the first time I’ve heard managing partners and chairs say ’25, 30, 40 individuals, whether they be counsel, senior counsel, or income partners, are not going to be here at the end of the year,’” he recalled. The raises “have served to give some chairs the cover they need to cut costs they would otherwise not have been able to cut before.”

Meanwhile, a softness in utilization is affecting all firms, although inventory buildup could provide some tailwinds in the second half, the bank noted.

In past years, the high-profit firms—which the bank identifies as firms posting $2 million in profit per equity partner or higher—have mostly bucked the wider trend of falling hours that has plagued their less-profitable peers. That’s no longer the case. Average annualized hours per lawyer among the Am Law elite dropped this year below 2013 levels to 1,723 hours per lawyer. That compares with 1,758 annualized hours by the mid-point in 2015 and 1,783 in 2014, according to Wells Fargo.

The decline, however, didn’t narrow the gap between the high-profit firms and the rest. In fact, the gap continued to widen. Hours this half at the high-profit group were nearly 5 percent above the Am Law 100 average (with 1,643 annualized hours) and nearly 10 percent higher than the second hundred (with 1,557 hours). In 2013, by comparison, the hours gap between the most profitable and the second hundred was 7 percent, the Wells Fargo data show.

At the same time, the elite benefited more from rate increases than lower-tier firms. “The rate gap is the defining characteristic so far this year,” Grossman noted. The high-profit firms “are suffering all the same problems, with demand close to flat and hours down” but still gaining in profitability and revenues, a process Grossman calls ‘uber-segmentation.’

Effective rates so far this year are up 4.58 percent for the high-profit firms; 3.32 percent for the Am Law 100 group; and 3.06 percent for survey participants in the second hundred, a gap of 1.5 percent. That’s triple the half-percent gap in effective rate increases between the elite group and the second hundred in 2013.