After stalling in the third quarter, law firm financial performance finished 2017 on a positive note, with a larger segment of the legal market contributing to upward trends in revenue and profits than in recent years, according to a new report from Wells Fargo & Co.
Wells Fargo Private Bank’s Legal Specialty Group on Tuesday released the results of its year-end check-in on law firm financials, showing average increases in revenue and profits between 3 percent and 4 percent for the legal market overall. The report, drawn from a survey of 160 firms, also showed an increase in demand across the law firms participating in the survey.
“The good news is that a broader swath of firms participated in the improving trends than in any year since the recession,” Wells Fargo said in its report.
However, despite positive financial markers overall, Wells Fargo also reported stratification across different segments of the legal industry. The largest and most profitable firms generally outperformed their smaller counterparts with respect to revenue and demand.
Firms in the Am Law 50 reported revenue growth of 6.8 percent in 2017, while the Am Law 100 as a whole reported a 5.26 percent increase in revenue. Firms in the Am Law Second Hundred saw a smaller revenue uptick of 2.33 percent in 2017, the report said.
Profit growth also differed across the different legal market segments, with Am Law 100 firms in the Wells Fargo survey seeing net incomes rise by more than 5 percent while the Am Law Second Hundred firms had a more modest increase of 1.21 percent. Profits per equity partner also rose across the board, but with variations: Am Law 50 firms experienced partner profit growth of 6.17 percent; Am Law 100 firms, overall, saw partner profits rise 5.18 percent; and firms in the Am Law Second Hundred saw partner profits increase a little more than 3 percent.
A similar pattern held true for demand. The Am Law 50 firms in Wells Fargo’s survey saw an average increase of 3.3 percent in billable hours in 2017, while the Am Law 100 saw an average increase of 2.14 percent in billable hours. Those figures mark notable differences from 2016, in which demand grew by less than 1 percent for those groups of firms.
The Am Law Second Hundred, in contrast, saw a 0.76 percent drop in billable hours in 2017. Still, that was a slight improvement over the 0.86 percent drop in demand those firms saw in 2016, according to the report.
Looking ahead, Wells Fargo’s survey results show that firms predict revenue growth in 2018 of 3.43 percent, although the largest and most profitable firms are more bullish than their smaller counterparts. Firms in the Am Law 100 forecast revenue growth of 4.42 percent, while those in the Am Law Second Hundred predicted a revenue increase of 2.87 percent in 2018, according to the report.
Wells Fargo also said that firms seem “uniformly more optimistic” about the number of hours their lawyers will log in 2018 regardless of firm size. The bank’s report showed that firms, overall, forecast an uptick in hours logged of about 2.4 percent in 2018.
“The enthusiasm is derived from a slight-to-moderate improvement in transactional activity,” the Wells Fargo report said. “Most believe the corporate tax changes and a general improvement in our economy will buoy corporate, M&A, capital markets, and other transactional work.”