The legal market took a turn for the worse in the third quarter of the year, according to a report released Thursday by Wells Fargo & Co., which backed up a similar report from earlier this week by Citi Private Bank’s Law Firm Group.
Year-over-year growth in revenue, demand for billable hours and revenue per lawyer all slipped in the third quarter after a relatively strong first half of the year, said the survey of 135 firms done by Wells Fargo Private Bank’s Legal Specialty Group.
Revenue grew 3.7 percent year-to-date through three quarters, which was down from 4.8 percent growth through the first half of 2017, Wells Fargo said. Demand for billable hours grew slightly at 1.4 percent through nine months, compared to 1.6 percent through six months. Revenue per lawyer through nine months had grown 2.3 percent; compared to 3.2 percent through six months.
The largest firms continued to outperform their smaller peers. The Am Law 100 saw larger growth than Am Law Second Hundred firms in revenue (4.4 percent versus 1 percent); demand (2.2 percent versus minus 1.8 percent); and revenue per lawyer (2.6 percent versus 1.1 percent).
But those averages are starting to mean less and less as the dispersion of firm performance grows greater, said Jeff Grossman, a senior director of banking in Wells Fargo’s Legal Specialty Group. The best performers are increasingly pulling up the averages.
Among Am Law 100 respondents, 46 percent of firms saw revenue growth through nine months of between 2 and 5 percent; 20 percent of firms saw revenue growth greater than 10 percent; and 5 percent of firms saw revenue fall more than 5 percent. The best individual performer saw revenue rise more than 25 percent without a merger, while the worst performer had revenue slip 14 percent. (Perhaps not surprisingly, law firm mergers were at a record pace through the third quarter of this year.)
Busier firms are also doing better at increasing their rates, Grossman said. For example, the standard rate for an Am Law 50 equity partner was up 5 percent through nine months. The average equity partner in the Am Law Second Hundred saw a rate increase of 3.2 percent.
“Their [utilization] is running over 80 hours behind and their rates aren’t growing as fast,” Grossman said of the Am Law Second Hundred. “You can see the slippage.”
Citi’s third-quarter report, released this week, said it is unlikely that 2017 will be as strong of a financial year as 2016 for the country’s law firms. The Citi report showed striking similarity with Wells Fargo on revenue growth, reporting 3.6 percent growth through nine months this year.
Billing rate increases of 4 percent were the largest factor; outpacing the 3.2 percent growth from a year ago. Offsetting that was a dip in demand of 0.2 percent, which compared unfavorably to a 0.3 percent increase during the same period last year.
One reason for optimism: The Citi and Wells Fargo reports said inventory, or uncollected bills, had reached a high point. Citi said inventory grew 4.6 percent at the end of nine months, well ahead of a 3.1 percent increase through the same period last year. And accounts receivable growth was up 6.7 percent through nine months, compared to only 2.6 percent a year ago.
Law firms will be gearing up for another year-end collections push. But as the holiday season looms on the horizon, don’t give into the eggnog quite yet.