The best that most Pennsylvania law firms can expect in terms of revenue growth in 2014 is between 3 and 7 percent, according to a review of both local and national surveys, as well as several years’ worth of reported financials and discussions with longtime legal industry observers.
Obviously, that’s heavily dependent on the state of the U.S. economy and, to an extent, the world economy. But most of the surveys, law firm economic data and industry watchers point to the range as a realistic benchmark.
A poll conducted in September by Citi Private Bank Law Firm Group showed most of its law firm leader respondents estimating that revenue would grow 10 percent or less in the coming 12 months. Thirty percent of the respondents said growth would be between 5 and 10 percent, and about one-third estimated that growth would be less than 5 percent.
That view is reflected in the view of neutral industry watchers.
“If I had to say, there will be single-digit percentage growth in revenue … maybe in the high single digits,” said Robin Sparkman, editor-in-chief of Legal affiliate The American Lawyer.
A review of the gross revenue numbers for 13 Pennsylvania firms in the Am Law 200 shows that, cumulatively, those firms grew their collective revenue from $6.18 billion in 2010 to $6.65 billion in 2012. That represents an increase of 7.7 percent between 2010 and 2012.
Pennsylvania’s Am Law 200 firms during the slow recovery have generally reported revenue increases between 1 and 9 percent. For 2012, Pepper Hamilton, Dechert and Fox Rothschild led the pack in the 8 to 9 percent range. The firms at the higher end have generally varied.
While those numbers are nowhere near the stratospheric jumps in revenue many firms enjoyed in the go-go days prior to the 2008 crash, it’s still a more optimistic outlook than many other firms are facing elsewhere in the United States.
For instance, the Citi poll showed law firm leaders losing optimism in the third quarter, and 32 percent of the respondents said they expected revenue to decrease or remain unchanged in the next 12 months.
Past financial performance, surveys and discussions with knowledgeable sources indicate Pennsylvania firms may be less likely to suffer decreases in revenue.
But in an age when consistency is hard to find, most of the data and surveys suggest that for law firms, every dollar counts, and firms will have to work hard to earn every one.
As an example, a survey released by Wells Fargo Private Bank’s Legal Specialty Group in August showed law firms saw anemic growth in the first half of 2013. On average, according to the survey, gross revenue rose 1.5 percent.
PA. FIRM LEADERS MORE OPTIMISTIC
Our annual Managing Partners Survey (see Zack Needles’ story on page 78) shows Pennsylvania firms to be a bit more optimistic than their national counterparts.
When asked to compare their firms’ two most recent fiscal years, 72 percent said revenues increased. That was up nearly 10 percent from the year before and up dramatically from 2010, when only 46 percent said they had increased. The number of firms that reported a decrease in revenue was identical in the 2013 survey to the 2012 edition: 10.3 percent.
Aric Press, ALM’s editor-in-chief, echoed Sparkman’s sentiments. He said most surveys he’s seen indicate growth will be slow and the average will be in the single digits. But he cautioned against putting too much into the surveys.
“But those are just averages, and averages are just averages. Some people will do better, and some people will do worse,” he said.
On the national scene, surveys like the one Wells Fargo conducted show increased stratification between firms. According to Sara Randazzo’s story for Legal affiliate The Am Law Daily on the Wells Fargo survey, one firm reported a nearly 35 percent revenue boost in the first half of the year, while another firm saw revenue down almost 20 percent.
That type of stratification hasn’t been obvious in Pennsylvania, at least among the Am Law 200 firms. Although firms like Morgan, Lewis & Bockius, K&L Gates, Reed Smith and Dechert have distanced themselves from other firms in the state in terms of gross revenue and profits per equity partner, they haven’t done it in terms of growth rates for gross revenue post-Great Recession.
So what does that mean? Pennsylvania firms remain highly competitive. And while it’s difficult to gauge exactly what’s happening at the firms below the Am Law 200 in Pennsylvania, there’s no indication that things are different for them compared to the state’s largest firms.
BATTLE FOR REVENUE
When you talk to Pennsylvania law firm leaders and lawyers, a common refrain is that it’s “a constant battle” to increase revenue.
To use a sports analogy, prior to the Great Recession, firms could experience large jumps in revenue growth with apparent (if not actual) ease, similar to a quick touchdown on a long pass.
Now, it’s more like Woody Hayes-style football: Three yards (or 3 percent) and a cloud of dust.
“Clients are more careful about spending and more consistently asking for and getting discounts and trying to use different law firms for different types of matters. … If they can, they will choose a less expensive law firm for less critical matters,” Press said. “Clients are getting sensitive to and better at pricing matters. … Higher-priced law firms are reducing their prices to get the work—or letting the work go.”
To that end, surveys and sources indicate firms are adapting, although slowly, to the more competitive landscape.
“Firms are also re-examining how the work gets done and using less expensive staff and more efficient processes,” Press said, pointing out that more firms are starting to use project management.
NO SWEEPING CHANGES
But Press cautioned against any sweeping predictions of change in the way the business of law operates in 2014.
“Changes are gradual. … It’s a gradual thing, absent any evidence that it’s not,” he said. “Where are the huge changes in client behavior?”
If a client takes work from a 700-lawyer firm and gives it to a 400-lawyer firm, Press said, “That is a difference on the margin.”
Outsourcing legal work to India or Bangladesh would be a huge change, he said. But the example of moving the work from a 700-lawyer firm to a 400-lawyer firm “is hardly an evolutionary step,” Press said.
STAFF CUTS WILL CONTINUE
That’s not to say that there aren’t trends for law firms to watch for in 2014. There’s every reason to think that because of technology, cultural changes and the constant drive to maximize profits, staff will continue to be targeted for cuts.
In our 2012 Managing Partners Survey, 9.4 percent of the respondents said they thought they would lay off staff in the coming year. For the 2013 survey, the number rose to 13.3 percent.
“Staff cuts are the current acceptable way of cost-cutting for firms,” Sparkman said. “If firms have overhead they can decrease, because of technology, staff will suffer.”
Attorney layoffs don’t seem to be an immediate threat in Pennsylvania. According to the 2013 Managing Partners Survey, only 3 percent of firms said they laid off attorneys between June 2012 and June 2013. Those results came even after 18.8 percent of the respondents in 2012 said they were going to lay off attorneys in the coming year. This year, only 16 percent of the respondents said they expected to lay off attorneys in the coming year.
On a national scale, Sparkman said attorney layoffs are “very firm-specific.”
“Firms are much more aggressive now about practices that are slow,” she said. “They don’t wait on it. They’re not patient.”
“Another trend to watch for is the rise of the nonlawyer CEO at law firms,” she said. “It’s a great time to be a firm administrator and not a lawyer.”
Sparkman said there would be more mergers and vereins as large firms look to “pair up” in places they need to be geographically, and regional firms feel “vulnerable.”
While there continues to be lateral movement nationally, the days of the solo-lawyer lateral defection in Pennsylvania have been on the wane the past few years. The trend has been for practice groups to jump ship, or for larger firms to acquire (but not merge with) smaller firms.
REGIONAL FIRMS WILL ENDURE
And what of large regional firms? Those were the firms consultants predicted years ago would disappear in the wake of consolidation, leaving megafirms and boutiques as the survivors. It hasn’t happened.
When it comes to regional firms in 2014, Sparkman said their fate will depend on their markets. In a hot market like Texas, she said, those local regional firms will be fine.
“Firms that are vulnerable, other firms will encroach on their market share,” Sparkman said. “In some ways, the leaders of larger firms have it easier, because they have different economies to rely on. Regional firms don’t have a lot of options” if the local economy tanks.
Press said regional firms would continue to endure.
“There will be continued consolidation, but some firms will prosper,” he said. “What evidence is there that clients are not going to continue to use them? If they are getting good service and they know that and are getting a good price, that is not going to change.”
So what should the leaders of law firms, big and small, do in such a competitive environment? Most analysts, commentators and general counsel will tell you that it’s pretty simple: You can’t know or be responsive to your clients enough.
“Firm leaders should really know their client base, stay close to their clients, ask lots of questions, and figure out what else they can do for their clients,” Press said.
Press advised that firms should tend to their own talent and increase it, and then look at how that talent meshes with a firm’s client base. If there are areas where a firm doesn’t align with its clients, it needs to find a way to fix that.
While there is always a debate whether law firms should work to get new business or get more business from existing clients, Press said there is evidence suggesting firms do quite well when they can further and deepen existing relationships with clients. •