()

Managing partners trying to make a case for painful cuts to their firms’ head counts are facing a dilemma: Things just aren’t bad enough right now.

That’s one of the management messages in a survey released Tuesday by Wells Fargo Private Bank’s Legal Specialty Group. The report found that rate increases are continuing to fuel revenue and profitability growth for some of the country’s biggest law firms despite an underlying stagnation in demand that has contributed to a steady fall in lawyers’ average productivity at firms across the industry.

The survey of 130 firms, including 60 in the Am Law 100, showed that overall revenue increased 3.8 percent for the first nine months of the year compared with 2015. That was despite demand that varied from flat to up a mere 2 percent. The revenue increases instead were powered by growth in billable hour rates ranging from 3 to 4 percent over the year prior. The survey expects similar growth in rates next year.

Meanwhile partner productivity, as measured by the average hours partners bill, has been slipping over the past nine months. Productivity dipped 1.6 percent from the same period last year, to 1,554 hours.

Hours fell at firms across the board, the Wells Fargo report found, but the drop was starkest among a group of “high profit” firms, which saw equity partner hours dip 2.5 percent.

The underwhelming productivity figures suggest that firms simply have too many lawyers for the current demand environment, said Joe Mendola, a senior director with the Wells Fargo unit. But the industry’s top-line growth may make the already difficult task of sending senior partners out to pasture all the more unlikely, Mendola said.

“How does the leader of a law firm convince their partners that this [soft] demand is going to be a challenge for us when, in fact, the partner is continuing to see their compensation grow because of rate increases?” Mendola said.

“The industry will probably have to become more aggressive managing attorney head count to the state of demand,” he added.

The survey also showed the nation’s largest firms continuing to outperform their smaller competitors.

Am Law 50 firms in the survey posted revenue increases of 4.9 percent over the same period last year. The Am Law 100 as a whole also increased revenue by 4.3 percent, but Second Hundred firms saw revenue fall 1.2 percent. One silver lining for those smaller firms was that they were the only group to see expenses fall. The larger firms continue to see compensation expenses increase as a result of associate raises that reverberated through the industry earlier this year.

Law firm leaders in the bottom half of the Am Law 200 may face even more difficult strategic decisions than their counterparts at bigger firms, Mendola said.

“I think the next question firms need to look at is what is the future for the type of legal work I do and what is my plan?” Mendola said. “Is my plan to focus on my stronger performing practice disciplines? Is expansion from a regional to a national firm an answer? Is a combination an answer? These are all things that many of these firms are looking at and considering. I don’t know that there is a one-size-fits-all answer.”

Contact Roy Strom at rstrom@alm.com. On Twitter: @RoyWStrom.