If it seemed at the time like the respondents to last year’s Pennsylvania Managing Partners Survey had an overly rosy view of the future, this year’s survey seems to mark a bit of a return to Earth.
While there’s still plenty of optimism in this, our 23rd annual survey, there are also indications that firms may be tempering their expectations heading into 2019.
That’s interesting given that, by most accounts, 2018 has been a very strong year in terms of demand for firms across the country, including in Pennsylvania, and many firms across the state grew revenue. In other words, managing partners’ optimism in last year’s survey turned out to be well-founded.
With that in mind, perhaps this year’s slightly more measured outlook simply represents lawyers being cautious with their expectations following one of the best post-recession years for the profession as a whole. After all, as Eagles fans know, success is hard to replicate two years in a row.
Additionally, some firm leaders may also be wary of the possibility of renewed economic turmoil in the U.S. and abroad in the coming year.
In this year’s survey, two of the 32 respondents, or just over 6 percent, predicted lawyer layoffs between June 2018 and June 2019. Last year, no one who responded to the survey predicted attorney layoffs.
The outlook was a bit more conservative compared to last year in terms of attorney head count growth as well, though that could be an indication that some firms reached their desired size after aggressive expansion in 2018.
Last year, 100 percent of respondents said they expected to grow head count in the coming year. This year, that number dipped slightly to 97 percent. Of those respondents who said they plan to grow attorney ranks, about 16 percent said they expect growth of more than 10 percent. That was down from 23 percent of respondents last year.
About 66 percent of this year’s respondents said they foresee growth of less than 10 percent, down from 77 percent last year, and 16 percent predicted they would stay the same size. One respondent said they expect to shrink slightly (meaning by less than 10 percent).
That somewhat more conservative outlook on future growth may be a reflection of the fact that, compared to 2017′s survey, more respondents reported growing head count slightly to significantly over the past year. Many Pennsylvania law firms were in active growth modes in 2018. Perhaps they’re now decelerating a bit as we head into 2019 and taking some time to digest those new hires.
In 2017, only 46 percent of respondents reported head count growth during the previous year, but this year that figure was up to 53 percent. That said, only 3 percent of respondents to the 2017 survey said their firms shrank the previous year, compared to 9 percent in this year’s survey. The rest said they stayed the same size.
Of course, year-over-year comparisons are not apples-to-apples in surveys like this one, which is anonymous and sent to a large and eclectic group of potential respondents.
The Managing Partners Survey is sent to managing partners of both Pennsylvania-based firms and Pennsylvania offices of out-of-state firms—everyone on our 100 Largest Law Firms list, though this year we also included leaders of some new firms that formed following the dissolutions of firms that had traditionally made the list. There were 32 respondents to the survey this year, the same number as last year, but the demographic breakdown is somewhat different from 2017′s respondents.
Last year, the largest group of respondents, at about 39 percent, was from firms with between 26 and 50 lawyers. That remained the largest group this year as well, but with a smaller overall share: only about 31 percent of respondents were from firms of that size this year.
The second largest group last year, at about 35 percent, was from firms with between 81 and 125 lawyers. But this year, that was the third largest group, with only about 22 percent of respondents.
And while only 17 percent of last year’s respondents came from firms larger than 125 lawyers, that was the second-largest group this year, with more than 28 percent of respondents.
In addition, just over 6 percent of respondents came from firms with between 11 and 25 lawyers and about 9 percent came from firms in the 51- to 80-lawyer range. One respondent came from a firm with 10 or fewer attorneys.
Another change from last year: In the 2017 survey, about 57 percent of respondents described their firms as being full-service, while about 26 percent described their firms as “limited practice” and about 17 percent said they were at boutiques. In 2018, close to 63 percent of respondents described themselves as full-service, with limited practice areas and boutiques each accounting for about 19 percent of respondents.
In 2017, 73 percent of respondents were from Philadelphia firms, 5 percent were from Pittsburgh firms, none were from Harrisburg and 22 percent were from elsewhere in the state. This year, only about 61 percent were from Philadelphia, just over 6 percent were from Pittsburgh, none were from Harrisburg and more than 32 percent were from elsewhere in Pennsylvania.
And while some of this year’s responses reflected a more cautious brand of optimism than last year’s, several other areas of the survey found firm leaders feeling as confident or even more confident than last year.
The percentage of firm leaders in 2017 who said they anticipated laying off staff in the coming year—9 percent—had been in line with the past few surveys. But this year, only one respondent, or 3 percent, said they planned staff layoffs between June 2018 and June 2019.
And the law firm leaders who responded to this year’s survey also seemed to be deriving more personal enjoyment from their jobs than last year’s respondents.
Last year, 63 percent of respondents said the practice of law is less enjoyable. And while that was down slightly from 68 percent in 2016, it was still significantly higher than the 33 percent who said the same in 2015. But this year, that number was back down to the 33 percent, while 10 percent responded that the practice of law had actually gotten more enjoyable and about 57 percent said it remained the same.
And while 93 percent of those who said in 2017 that the practice had become less enjoyable blamed economic pressures, that number fell to 75 percent this year. This year, 58 percent of respondents who noted a decrease in enjoyment pointed to increased client demands; 42 percent blamed an overall rise in competition; and 25 percent cited a decrease in attorney professionalism and civility.
No More Merger Madness?
As just about every legal consultant who penned a report recently can attest, law firm mergers have been white hot across the country over the past two years. Pennsylvania has certainly been no exception, but there are some indications in this year’s Managing Partners Survey that the trend may be cooling here.
Last year, about 23 percent of respondents said they had merged with another firm or firms within the past two years, up from about 17 percent in 2016’s survey. This year, only about 16 percent of respondents said they’d merged with another firm in the past two years.
But the biggest change came in respondents’ outlook for the coming year. In 2017, about 23 percent of respondents indicated they were actively seeking a merger. That figure was the highest it had been in seven years. But this year, that number was just over 9 percent, the lowest it’s been since 2013. However, it should be noted that 75 percent of respondents said they remain open to the possibility of a merger.
But if firms are being less proactive this year about finding merger partners, it doesn’t seem to be an indication that they’re against expanding altogether.
In 2017, the percentage of respondents who said they planned to open one or more new locations in the coming year rose to 33 percent from 26 percent the previous year. This year, about 34 percent of respondents said they’re planning new locations.
Compensation and Financials
While the legal profession overall had a strong 2018, revenue growth over the past year seemed to be slightly less robust for this survey’s respondents as compared to last year’s.
While 85 percent of respondents last year said they grew revenue, that number was down to about 77 percent this year. In addition, 71 percent of respondents this year said revenue per lawyer (RPL) increased, compared to 75 percent last year. And while in last year’s survey the remaining 25 percent said RPL simply remained unchanged, this year nearly 10 percent reported RPL decreases.
A greater percentage of respondents this year reported net profit increases, however. Last year, 63 percent said net profits increased, but this year that figure was up to about 68 percent. The percentage of respondents reporting a decrease in net profits remained flat year-over-year at 10 percent.
Meanwhile, about 68 percent of respondents in 2018 said their profits per equity partner (PPP) increased, compared to 65 percent in 2017. And the number of firms reporting PPP decreases has continued on a downward trajectory over the past few years. In 2016, about 13 percent of respondents reported decreases; in 2017, that number dipped to 10 percent; and this year it dropped again to just over 6 percent.
Still, rising costs remain an issue for Pennsylvania firms.
This year, 58 percent of respondents said costs increased, as compared to 60 percent in each of the past two years’ surveys. And the percentage of respondents who said they increased starting salaries in 2018 stayed in the same ballpark as the past two years as well: 55 percent this year, compared to 57 percent last year and 54 percent in 2016.
While raising rates and switching focus to higher-demand practice areas remained the two most popular profitability retention methods among this year’s respondents, the percentage who this year said they de-equitized partners bumped back up to about 13 percent after dropping from 20 percent to 9 percent in last year’s survey.
However, the percentage of respondents to this year’s survey who said they expect to de-equitize partners in the coming year dropped to about 16 percent from 23 percent last year.
One the steepest and most surprising declines in this year’s survey was in the percentage of respondents who reported having a marketing budget. Last year, about 91 percent of respondents reported allocating funds for marketing efforts, compared to 92 percent in 2016. But this year only about 69 percent said they had a marketing budget.
That figure is all the more curious given that the percentage of respondents who said they have a nonlawyer marketing director or chief marketing officer rose to 75 percent this year from 62 percent last year.
There was also a fairly sharp drop in the percent of respondents this year who said they see a clear return on their marketing investing, from 71 percent last year to 59 percent this year.
Also this year, the list of practice areas in which firm leaders saw the most growth potential was largely in line with last year’s responses, save for a few notable differences.
Commercial litigation once again topped the list of areas with the strongest growth potential, this year cited by about 63 percent of respondents as compared to 43 percent last year. Like last year, intellectual property came in second, but was cited by 44 percent of respondents this year as compared to 33 percent in 2017.
But one practice area in particular saw a steep decline in mentions by this year’s survey-takers after a major spike last year: venture capital/emerging business work, which went from being cited as a growth area by about 9 percent of respondents in 2016 to 29 percent in 2017, was cited by just 7 percent of this year’s respondents.
There was also one item of note with regard to practice areas this year’s respondents viewed as fading a bit: employment work, which 33 percent of respondents last year saw as a major growth opportunity and no respondents cited as a declining practice area, was named by 16 percent of this year’s survey-takers as an area with significantly decreasing growth opportunities.
While much of the Managing Partners Survey requires firm leaders to look ahead to the coming year, it also asks them to look even further into the future at who will succeed them.
Last year, the percentage of respondents who said their firms have succession plans rose to 68 percent from 52 percent the previous year. This year, that figure fell to 60 percent. Meanwhile, the percentage of respondents whose firms provide leadership training to leaders at any level ticked up to 58 percent from 55 percent.
But firms have not let up on business development training. This year, nearly 84 percent of firms said they provide such training, up slightly from 82 percent in 2017.
On the client value side of things, firms still appear to be trying to gauge the effectiveness of client satisfaction interviews.
The use of client satisfaction surveys saw a rise from 26.6 percent to 33.3 percent in 2016, but fell back down to under 23 percent in 2017. This year, that figure was up slightly to 28 percent. And while there was a big shift away from in-person or over-the-phone client interviews to written interviews among 2016’s respondents, respondents have favored oral interviews the past two years. In 2016, only 12.5 percent of respondents conducted oral interviews. But that figure rose to 60 percent in 2017 and again to nearly 63 percent this year.
One area of huge importance to clients that law firms do appear to be paying attention to is diversity.
This year, 71 percent of respondents said their firms’ have diversity initiatives, up from 55 percent last year. And after 86 percent of respondents said last year that they received questions about diversity figures at their firms on RFPs, nearly 94 percent said the same this year.
The number of respondents who said their firms gained clients due to diversity issues stayed steady at 24 percent this year, while none said diversity issues cost them clients, down from nearly 5 percent last year.