The Second City fared more like an also-ran in the latest report on law firm financials from Citi Private Bank, which ranked a group of Chicago-based firms among the worst-performing of 11 regions tracked by the bank through the first three quarters of 2016.
Demand for legal services through the third quarter dropped by 2.9 percent compared with the year prior, ranking next to last among all regions and far below the 0.3 percent growth seen nationally. Revenue was up 2.2 percent, compared with 3.7 percent growth nationally. That was mostly a factor of rate increases, which grew 2.1 percent through nine months.
Chicago was one of seven regions that saw expense growth outpace revenue increases. Expenses among the Chicago firms grew 4.9 percent from a year ago, driven primarily by a 7 percent increase in lawyer compensation, said John Wilmouth, a senior client adviser at the bank. Nationally, expenses rose 3.4 percent.
Lawyer compensation increased across the nation after firms agreed to pony up higher wages to associates earlier in the year. But Chicago was among the most acutely affected regions, seeing the third-highest rise in attorney compensation, Wilmouth said.
The next three months do not look much brighter, Wilmouth said, because Chicago also saw one of the largest drops in inventory—which is accounts receivable and unbilled time. Inventory fell 0.1 percent from a year ago, ninth-lowest among the regions, and much lower than the 3.1 percent growth nationwide.
“When you think about the fact that inventory is actually down and the fact that you still have to see another several months’ impact from lawyer compensation expense associated with the increase in both head count and salaries, margins are likely to be squeezed even further,” Wilmouth said.
The Citi Private Bank survey tracks 13 firms headquartered in Chicago, Wilmouth said. Those firms range from Am Law 25 members to small firms, he said. Nationally, the bank surveys 180 firms, including about 80 Am Law 100 firms, about 50 Second Hundred firms and close to 60 niche/boutique firms.
Firms in Chicago and across the country will struggle to see revenue growth as a result of uncertainty in the political climate delaying business action; with capital markets continuing to lag; and with continued depressed oil prices, Wilmouth said.
“Most all the regions are being impacted by the macroeconomic trends,” Wilmouth said. “Chicago is no different.”