A new year does not necessarily mean a new beginning for law firm leaders who are anticipating 2013 looking a lot like the ups and many downs of 2012. While Pennsylvania firm leaders have expressed concern about how the nation’s financial picture and a resulting timid client base would affect their top line, they were cautiously optimistic that certain practice areas could be busy in 2013.
But that might not be enough to compensate for rate pressures, which could force firms to look at additional cost-cutting measures in 2013, law firm leaders and consultants said.
“It was a very, very hard year,” Ballard Spahr Chairman Mark Stewart said of 2012, “and I don’t think it’s going to get any easier in 2013.”
Clients are looking at their legal spend more closely than ever, Stewart said.
“We keep waiting for an uptick in business transactions, but as long as you’ve got the uncertainty coming out of the government, people are going to hold back,” Stewart said.
As many firms have reported, Ballard Spahr saw a rise in deals in the fourth quarter of 2012, but Stewart said the department isn’t sure just yet whether that was a tax-driven phenomenon or a sign of what is to come in 2013. What will be busy in 2013, Stewart said, is the firm’s consumer financial services practice and any other area that is heavily regulatory in nature.
White-collar criminal defense, particularly in the financial services area, will also be hot this year, he said.
For many firm leaders, 2013 really hinges on what is happening in Washington.
“To me, 2013 is highly variable based on when, and if, the politically driven uncertainty that really is a cloud over the economy dissipates,” K&L Gates Chairman Peter Kalis said. “There’s an enormous amount of energy ready to be unleashed by our clients. There’s an enormous amount of capital on the sidelines. The question that plagues us, and not just in the United States, is when will our political class understand that markets despise uncertainty because it’s paralyzing and it undermines the planning functions.”
Kalis said it seems clear that the first quarter, or 25 percent of the year, will be “enshrouded” in the debate over the country’s debt ceiling. There are numerous opportunities clients are ready to jump on, particularly in the areas of energy independence and the technologies being generated by Pittsburgh-based and other research universities. But there is a cloud of uncertainty that is holding that work back, Kalis said.
“Am I pessimistic or optimistic?” Kalis asked. “I guess I’m too old to be either. I’m just realistic that I think the facts are as plain as day and our elected officials’ unwillingness to embrace them is unfortunately also as plain as day.”
Kalis said firms would do well to be conservative in this market, because there is no great penalty for that if things go well in 2013 and a potentially severe penalty if 2013 turns sour.
For Drinker Biddle & Reath Chairman Alfred W. Putnam Jr., the 2012 fiscal year doesn’t end until January 31, but he said the year was “OK.”
“But ‘OK’ is the right word. I think that the marketplace we’re in, the legal environment we’re in, has been pretty challenging since 2008. … Our firm has been fortunate, I think, and we’ve been able to weather most of the storms, but I’m not sure I see it changing that much,” he said.
Putnam said Drinker Biddle had a better December than it budgeted because of an uptick in deal work, but, like Stewart, he wasn’t sure whether that was a short-lived phenomenon caused by 2012′s more favorable tax structure.
Putnam said he expects the firm’s insurance regulatory work and other regulatory practices, its health care practice, class action litigation and its products liability work to be strong in 2013.
“We have some things that are strong, but there’s enormous pressure to do the same work, but the client wants to save money,” Putnam said. “So even if you’ve got the work and they like the work and you seem to be doing better in terms of picking up things, they want to see if you can do these three things for them and do it more cheaply.”
Putnam said the end result is that new work that could bring a rise in revenue in a firm’s strongest practice areas can be washed out by price pressure.
Putnam said the industry is not in boom times, and that isn’t going to change in 2013. He said it may never change after a “sea change” in how the industry operates.
Paula Alvary, a law firm consultant with Hoffman Alvary in Newton, Mass., said most firms are uneasy about 2013. While there is still much to be learned about the coming year, Alvary said she thinks “it’s an unusual firm that anticipates a fully confident, robust 2013. I think most firms are very, very cautious.”
To that end, firms will have to take measures to ensure they can maintain profitability while continuing to face decreasing or slower-growing revenue, Alvary said. That might mean continued cost-cutting, harsher scrutiny of partners to improve the denominator for profits per equity partner, and increasing billing rates so that firms can afford greater discounts without reducing overall revenue and intensive marketing, Alvary said.
“We can anticipate that there will be increasing stratification among firms,” Alvary said. “Some will have had a very, very good year [and] others will have done modestly better but are managing their way to earnings and not experiencing an increasing top line unless they are adding lawyers.”
Much of what a firm does to combat these issues is culturally driven. By law firm standards, many firms may say they are “close to the quick” in terms of cutbacks, but by typical business standards there is always more room to cut, Alvary said. However, many firms are close to the point where big net gains will have to come from major structural changes, such as moving back-office operations to a less expensive city or changing how matters are processed throughout a firm, she said.
Not all firms are as concerned about 2013 as it may appear.
Pepper Hamilton Chief Executive Officer C. Scott Green said the firm expects to see double-digit growth in its bottom line when 2012′s numbers are finalized, making his view of 2013 “pretty optimistic.”
While Green said he was concerned about the fiscal cliff issues, there was a relatively quick resolution to those talks that Green said will actually now result in more tax work for attorneys in 2013.
Government investigations and regulatory work will also continue to be strong this year, as will white-collar criminal defense and investigations, Green said. Pepper Hamilton happens to be particularly well positioned for that work, he said. That became even more the case after the firm’s 2012 acquisition of former FBI Director Louis Freeh’s law firm and international consulting group.
Many deals closed at the end of 2012, but Green said Pepper Hamilton still has a strong pipeline of work in the corporate area. Health care work will also continue to be busy in 2013, he said. Bankruptcy is one area that still continues to struggle nationally, Green said, not just of Pepper Hamilton but in general.
Midsized firm leaders said business was steady overall in 2012 and they were optimistic things would stay that way in 2013.
David M. Kleppinger, chairman of McNees Wallace & Nurick in Harrisburg, said his firm exceeded budget expectations last year and is anticipating several practices, including energy, labor and employment and intellectual property to remain robust in 2013.
Kleppinger said business transactional activity also picked up toward the end of 2012, as clients were eager to close deals before the fiscal cliff deadline.
Now that the fiscal cliff issue has been at least partially resolved, Kleppinger said he was unsure whether merger and acquisition activity would continue at the same level.
Regardless, Kleppinger said, his firm’s business attorneys, many of whom serve as general counsel to a number of small and midsized businesses, continue to anticipate a busy 2013 beyond just M&A work.
Similarly, Maury B. Reiter, managing principal of Kaplin Stewart Meloff Reiter & Stein, said his firm also saw a flurry of fiscal cliff-induced M&A activity in the last quarter of 2012.
Reiter said he believes transaction work will remain steady in 2013, though “it won’t be at the pace it was in the last three months of 2012.”
In addition, both Reiter and Kleppinger said they believe commercial real estate work is on the upswing.
“Clients are buying and clients are selling,” Reiter said, adding that leasing is also active.
Kleppinger said he believes part of what’s driving this uptick is an increase in lending, as the relationships between financial institutions and borrowers have begun to improve.
“I think financing — not that it’s easy, per se — but at least people are better understanding the rules of the game in terms of being able to obtain financing,” Kleppinger said, adding, “Right after Dodd-Frank you weren’t seeing any commercial real estate deals done. Now that’s thawing.”
Kleppinger said the growth of the natural gas industry in Pennsylvania has also indirectly contributed to a rise in commercial litigation as well, with more and more hotels and restaurants being built in Marcellus Shale regions.