Lisa Kohut
Lisa Kohut ()

While Pennsylvania law firms saw expenses rise more and revenue rise less than their national counterparts in comparing the first quarter of 2013 to the first quarter of 2014, an area banker cautioned that the state’s firms just had less catching up to do after a stronger-than-average start to 2013.

“Our numbers, at first glance, don’t look all that promising, but when you compare it and look at what happened in ’13, you see it’s just a flat line versus more ebbs and flows,” said Lisa Kohut, a director with Citi Private Bank Law Firm Group in Philadelphia.

Kohut was referencing a Citi survey comparing financial results from the first quarter of 2014 with where firms stood at the end of the first quarter in 2013. Citi surveyed 177 law firms across the country, with 11 firms from Pennsylvania participating.

Pennsylvania firms performed in near reverse to their national counterparts on revenue and expenses. The local firms increased revenue 1.9 percent compared to a national average increase of 4.3 percent. And Pennsylvania firms saw expenses rise 4.4 percent while the national average came in at a rise of 1.6 percent.

But Kohut noted that Pennsylvania firms outpaced the industry on revenue in the first quarter of 2013 and had less room to improve than other markets.

Perhaps the larger concern is that rises in expenses outpaced revenue gains for Pennsylvania firms last quarter. Kohut cautioned, however, that one quarter doesn’t indicate what the entire year will bring. She said much of the expense gain for Pennsylvania firms was from increased compensation costs due to increased hiring.

Pennsylvania firms were outpaced only by firms in the central part of the country (excluding Chicago, which is tracked by Citi as a separate market) when it came to overall headcount growth. The state’s law firms increased headcount 1.9 percent first quarter over first quarter. That was compared to a 0.7 percent average increase nationally. The central market increased headcount 2.4 percent.

While consultants have been saying for some time that Pennsylvania has room to cut equity partners, that tier grew 1.4 percent quarter over quarter, while the national average remained flat. But Kohut said the state’s firms are being mindful of who they bring on, as evidenced by the fact that overall headcount growth is outpacing equity partner growth.

Kohut said she thinks Pennsylvania firms are hiring more as part of an appetite for expanding in new markets or filling out newer offices. She said the bulk of Pennsylvania firms’ hiring is happening outside of the state.

Pennsylvania firms were able to increase revenue as much as they did more because of rate increases than an increase in demand.

According to the survey, local firms actually saw a decline in demand, or total hours logged, of 0.2 percent compared to a national average increase of 1 percent. Kohut said demand is actually moving in the right direction considering it was down 2.6 percent for Pennsylvania firms in the first quarter of 2013 and is now essentially flat.

When it came to rate increases, Pennsylvania firms were in the middle of the pack, increasing rates 3.6 percent compared to a national average increase of 4.4 percent. The southern California market increased rates the most at 6.9 percent, followed by Chicago with a 5.4 percent increase. Kohut said Pennsylvania firms have room to increase rates more than they have.

The total hours logged by Pennsylvania lawyers fell more than in any other market, dropping 2.2 percent. Nationally, firms saw an average increase of 1.1 percent in lawyer productivity. Texas had the largest increase, logging 5.1 percent more hours per lawyer than the first quarter of 2013.

When asked whether it was problematic that Pennsylvania firms saw a decrease in demand and hours logged despite an increase in attorneys, Kohut said that could be due to the ramp-up time it takes for lawyers to start billing time. Kohut said that was “something to keep an eye on, but nothing alarming right now.”

A positive sign moving further into 2014 is that Pennsylvania firms saw a 5.2 percent increase in overall inventory, which includes work in progress and accounts receivable. Nationally, that metric increased an average of 3.7 percent. Pennsylvania firms are also shortening their collection cycles, which Kohut said is a good thing given it means firms are bringing in cash faster. Collection cycles at area firms decreased 4.6 percent compared to a national average of a 0.5 percent increase.

But Kohut did note that Citi is monitoring the situation, because a significant portion of the inventory increase was in work in progress, or unbilled time. Kohut said the concern is that firms may be writing off time for aged inventory. While the collection cycle is improving, it may be because firms are going after low-hanging fruit, or more recently billed work, Kohut said. So while the overall inventory and collection numbers are largely a good thing for Pennsylvania firms, Kohut said firms should be sure there is a balance of both older and newer inventory.

On the whole, the firms that had the best performance for the first quarter of 2014 were often hit harder in 2013 than the Pennsylvania firms were, Kohut said. Those firms that are performing the best at the start of this year are ones with an international presence that are benefiting from a global economy, she said.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.