After months of uncertainty resulting from the Brexit referendum and the presidential election in the United States, financial markets seem to have come to a rudimentary consensus about what to expect in 2017. And for the nation’s biggest law firms, that outlook is, for the most part, positive.
“Generally, change in Washington has historically been good for law firms, but this particular change will be a mixed bag for law firms, and there will be ups and downs,” says consultant Kent Zimmermann of the Zeughauser Group.
Law firm leaders appear to agree. In The American Lawyer’s 14th annual Law Firm Leaders Survey, which was conducted from early September to mid-October, 69 percent of respondents said that they were moderately optimistic about 2017 with respect to their firms. Fourteen percent said that they were “very” optimistic, and 10 percent said that they were uncertain. Only 5 percent said that they were somewhat pessimistic. The survey was conducted by ALM Legal Intelligence; 103 law firm heads responded to it.
“I’m in the 69 percent [who were moderately optimistic], and I think 2017 is going to be a good year,” says James Carr, partner at Kelley Drye & Warren. He says that 2016 was lucrative for the New York-based firm, and that he expects more of the same in 2017, even with the change in the White House. “I do think that a change in administration from a Democrat to a Republican will mean more initial work, there’s no question about that,” Carr says.
In the survey, which was conducted before the election, the greatest percentage of respondents, 32 percent, said that they expected to see the most revenue growth next year in corporate work, with litigation as the second most popular response, at 27 percent. Ten percent said that they expected to see the most growth in real estate. Seven percent selected bankruptcy, and the same percentage chose intellectual property.
Meanwhile, 30 percent of respondents said that they expected litigation to be the most financially challenging practice area in 2017. Bankruptcy/restructuring followed with 26 percent, trailed by corporate with 16 percent and intellectual property with 14 percent.
Carr says that those practice areas could change if President-elect Donald Trump follows through on various campaign promises. Although Trump said during the campaign that he supported keeping interest rates low, at one point, he accused the Federal Reserve System of keeping interest rates artificially low. If interest rates go where the market dictates in a Trump administration, Carr says, it could lead to an upswing in bankruptcy work.
“Interest rates have been low for many, many years,” Carr says. “If interest rates go up and you have trillions of dollars of junk debt that gets refinanced, you’re going to see an uptick in bankruptcy.”
Zimmermann says that the new administration could also usher in upticks in international trade, regulatory work and tax law. “This election, looking at it in a nonpartisan way, could possibly be a very good thing,” he says.
In the survey, 54 percent of respondents said that they expected deal flow in 2017 to increase moderately over 2016, while 41 percent said that they anticipated flat growth. Eighty-three percent of respondents said that they expected billing rates to increase by 5 percent or less. Eleven percent said that they expected rates to increase more than that, while 6 percent said that they expected them to be flat.
Bigger and Richer?
Respondents also expressed confidence that there was growth potential for their firms in 2017. Seventy percent of respondents said that they expected to increase their firm’s head count in 2017 by 1-5 percent. Nine percent expected it to grow by 6 -10 percent.
More than a quarter of respondents, 26 percent, said that they expected profits per partner at their firms to increase by more than 5 percent next year. Forty-seven percent projected an increase of 5 percent or less. Twenty-four percent said that they would be flat, and 3 percent anticipated a decrease of 5 percent or less.
Zimmerman says that those projections may be overly rosy. “The results of the survey are more optimistic than I would have expected,” he says. “I think that the reality for most firms is not as sunny.”
According to the 2016 Thomson Reuters Peer Monitor Survey, demand for law firm services was essentially flat in 2015, continuing the pattern seen over the last six years. Clients are much more willing to disaggregate work, combining services among several different providers in order to be more efficient, that survey concluded. “[Clients] are more open than ever before to utilizing nontraditional service providers, including non-law firms, to provide a wide range of services previously obtained almost exclusively from law firms,” the Thomson Reuters survey noted.
Zimmermann says that this trend has its roots in the recession of 2008-2009. With in-house legal budgets cut back, clients began bypassing Am Law 200 firms for run-of-the-mill deals, sending the work instead to smaller, less expensive firms or boutiques. That practice continued, even after the economy recovered.
“The end result was that some work migrated away from Am Law 200 firms to boutique and alternative service providers,” Zimmermann says. “There are too many lawyers [at Am Law 200 firms] and not enough work to go around. That would not naturally lead one to conclude that this is a time to grow head counts.”
While there are exceptions to this pattern, this narrative rings true for many firms. Ken Cutler, managing partner at the Minneapolis’ Dorsey & Whitney, said that after the financial crisis, his firm went through a period of belt-tightening. Since then, it has hired smaller classes of associates and used subsidiaries to handle document reviews.
“There is a fundamental change in the young associates that we hire,” Cutler says. “Documents reviews that they did in the old days, in our case, are done by subsidiaries.”
“One-third of the total cost of litigation is in discovery,” Zimmermann said. “This chunk has melted because clients are sending the work to others.”
According to client demands for efficiency and lower costs, firms have been making decisions about where they want to build pre-eminence and have been hiring laterals, both individually and in groups, to help the firm build breadth and depth, Zimmermann says.
However, 83 percent of respondents to the Law Firm Leaders Survey said that they expected to spend 0-10 percent of their time on lateral hiring. Fourteen percent indicated that they expected to spend 11-25 percent, and 3 percent said they would spend 26-50 percent.
The changing market demands from clients and the overcapacity could hamper some firms that haven’t been disciplined about growth and committed to profitability, Zimmermann says. “Some firms that do those things will have a great year next year, but most of the pack is not in that area,” he says. “Most in the pack is not dealing with these things.”