Law firm leaders are slowly, surely gaining confidence in the strength of the U.S. economy and the outlook for their businesses, according to a report released Tuesday by Citi Private Bank.
The quarterly survey of law firm managing partners’ projections for the future showed demand projections increased, which may prove to be a bullish outlook for an industry that has been dogged by stagnant demand, particularly among Am Law Second Hundred firms.
A separate Citi report on law firm financial results from the first quarter showed demand rose a mere 0.4 percent among a survey of 180 firms. The results were stratified, with Am Law 100 firms posting better results than their counterparts in the bottom half of the Am Law 200. Seventy-one percent of firms in the Second Hundred experienced a drop in demand, compared to a surveywide figure of 52 percent of firms experiencing a drop in demand, the report found.
But that hasn’t darkened a somewhat rosy view of the market among law firm leaders. The confidence survey measures their outlook for 10 categories; all of which are currently in the “confident” range, while only one—growth in equity partners—saw a drop in expectations in the latest report.
Leading the way with an index value of 138 out of 200, firm leaders are most high on the likelihood of increases in their ranks of associates. The outlook for the U.S. economy saw the biggest jump among managing partners from the previous quarter, with the index value jumping 15 points to 125, which the survey authors categorize as “tepid.”
Net income projections rose as well but remained lower than revenue expectations. The survey says expense growth driven by lawyer compensation costs may crimp profit margins.
If that bears out, it would be a repeat from first quarter results, which showed expenses increased 5.6 percent, outpacing revenue growth. Lawyer compensation expense growth, at 9.1 percent, drove much of that increase, Citi reported. The report says that is the first evidence of the full effect of associate compensation increases many firms implemented since mid-2016.
With headcount projections on the rise, law firm leaders may expect to struggle to keep productivity at its current levels. Last quarter, firms were able to maintain productivity, thanks to a 1.9 percent increase in lawyer demand.
One difference between the confidence projections and the financial survey results is that the confidence projections are not broken down by firm size. Given the disparity in results between Am Law 100 and Am Law Second Hundred firms, it could be likely that leaders of smaller firms have starkly different views than their counterparts at large firms.
For example, Am Law 1-50 firms in the first quarter saw demand growth of 2.4 percent, compared to a decline in demand of 4.1 percent for Second Hundred firms.
Gretta Rusanow, head of advisory services at Citi Private Bank, said Second Hundred firms may experience more consolidation in the coming months.
“This appears to be a segment under pressure,” Rusanow said.