In many respects, Pennsylvania law firms had a stronger first half of the year financially than their national counterparts, but they may be a little more optimistic than warranted when it comes to how the rest of the year will play out, according to results from Wells Fargo Legal Specialty Group's midyear survey.
Mary Ashenbrenner of Wells Fargo in Philadelphia said firms' revenue outpaced expectations in the fourth quarter of 2012. Many firms across the country failed to realize, however, those favorable results were more of a timing issue resulting from an acceleration in activity and collections in the quarter as clients took advantage of more favorable tax rates, she said.
"What we normally would have seen in the first quarter of 2013 we saw in [the fourth quarter of] 2012," Ashenbrenner said.
That meant many firms started out 2013 with reduced inventory levels, which could be a real challenge as they move through the year, she said. The good news for Pennsylvania firms was that gross revenue was up 3 percent in the first six months of 2013 compared to the first six months of 2012, Ashenbrenner said. That is compared to a 1.5 percent rise in revenue nationally.
The biggest driver there was the 3.5 percent rate increase Pennsylvania firms dished out in 2013. But that was on par with what firms did nationally. Ashenbrenner said what Pennsylvania firms were able to do, however, that firms across the country did not, was increase hours per lawyer. Hours were up just under 2 percent among Pennsylvania firms while they were down about 2 percent nationally, Ashenbrenner said.
Ashenbrenner chalked that up to what she described as Pennsylvania's "value play," of providing more affordable lawyers with attractive practice specializations.
Pennsylvania firms are about even with firms nationally when it comes to profitability. Ashenbrenner said both groups saw about a 1.5 percent rise in profits.
One area of concern for Ashenbrenner, she said, was that Pennsylvania firms saw a 5 percent rise in expenses in the first half of 2013 compared to a 2.8 percent rise nationally.
"Expenses continue an upward trend and that puts further pressure on profitability," Ashenbrenner said.
She said Pennsylvania firms may have become overly optimistic in their hiring given the strong fourth-quarter 2012 results. Ashenbrenner said Pennsylvania firms have done a good job of managing expenses in the non-timekeeper area, but they could do more when it comes to associate and partner productivity.
As part of its survey, Wells Fargo asked the 120 respondents composed of Am Law 100, 200 and regional firms whether they thought they would exceed certain budget projections by the end of the year.
In Pennsylvania, 57 percent of firms said they would exceed their revenue projections, 71 percent said they would exceed net income plans and 43 percent thought they would exceed expected hours logged. The entire industry was optimistic, but Pennsylvania was even more so, Ashenbrenner said.
"What this tells me is, again, I think some firms have failed to realize the favorable results of 2012 were really an acceleration of what would normally have been collected in the first quarter of 2013," Ashenbrenner said.
Based on current demand, productivity and inventory, Wells Fargo is projecting a "less than stellar" 2013 and low to no growth in demand for the next few years, Ashenbrenner said.
"There's a myth out there that the recession is over [and] expense actions are behind us," she said. "We don't agree with that."
Ashenbrenner said firms need to continue an aggressive expense management philosophy that focuses on productivity at all timekeeper levels.
"I think we're going to see a slowdown in hiring because we're not really seeing any uptick in inventory levels," Ashenbrenner said. "The demand for legal services is flat. It's flat in every region. If demand isn't changing, I don't know why you would be increasing timekeeper headcount."
That doesn't mean firms aren't, or shouldn't be, looking to add profitable practice groups or attorneys, Ashenbrenner said, adding that lateral hiring continues to be very busy. Growing headcount for the sake of growing headcount, however, is not a good idea, she said.
Overall, Wells Fargo is continuing to see a stratification of firms, with some significantly outperforming and others "materially underperforming" the averages found in the survey.
"Those firms that were able to pivot quickly and take decisive action when they needed to are the firms that are now outperforming," Ashenbrenner said.
On the whole, Pennsylvania firms fared better than their counterparts nationally, Ashenbrenner said, albeit with the caveat that they need to continue a "laser focus" on expense management and possibly alter their expectations for this year's overall financial outlook.
Gina Passarella can be contacted at 215-557-2494 or at firstname.lastname@example.org. Follow her on Twitter @GPassarellaTLI. •