California law firms continued to enjoy growing revenue through the first three quarters of 2018, fueled by strong demand that outpaced most other regions surveyed in a recent report by Citi Private Bank’s Law Firm Group.
Citi’s latest snapshot of law firm performance found that both Northern and Southern California-based firms saw revenue growth accelerate to above 9 percent through September, compared to the industrywide average of 6.3 percent. Citi senior vice president David Altuna said that revenue for Southern California firms was up by 9.3 percent so far this year, while revenue for Northern California firms increased 9.1 percent.
California firms are exceeding their peers in other regions, said Altuna, adding that the “very strong results,” were propelled by high demand growth.
Demand in Northern California increased by 5.3 percent during the nine-month period, which was the highest among the 11 geographic regions analyzed. In Southern California, demand was up by 5 percent, double the overall U.S. legal industry average of 2.5 percent.
When it came to lawyer billing rates, firms in Northern California posted a 4.3 percent increase during the three-quarter period. Southern California firms, on the other hand, raised rates by 3.1 percent on average. Those increases compare to a 4.3 percent increase nationally.
Altuna said the bank expects revenue growth to continue, given an inventory buildup heading into the end of the year, but growth in expenses will also accelerate. Southern California firms saw inventory increase 10.2 percent, while in Northern California inventory growth was 8.8 percent, Citi found. Industrywide, firms experienced inventory growth of 4.6 percent.
Both the northern and southern parts of the state are feeling rising expense pressures, Altuna noted, with expenses growing faster than in other regions surveyed. Total expense growth was 5.8 percent in Southern California and 7.2 percent in Northern California, exceeding the industry average of 5.9 percent.
“What we are seeing on the expense front is just broad pressure on expenses,” said Altuna. “We are hearing that firms are investing in technology and investing in cybersecurity, they are investing in talent on the professional side,” he added, explaining that the expense surge is also in part due to the impact of associate salary increases that began to take effect earlier in the year.
Over the first half of 2018, expenses stemming from lawyer compensation were up 5.8 percent in Northern California and 6.0 percent in Southern California, but nine months into the year those numbers accelerated to 11.7 percent in Northern California and 9.9 percent in Southern California, Altuna said.
California is adding lawyers to meet the growth in demand, with head count increasing faster than in any other region surveyed by Citi. Head count increased by 4.3 percent in Northern California and by 3.6 percent in Southern California.
Altuna said productivity is rising at the same time. “So, while they are adding lawyers, investing in talent to meet the demand, the lawyers are working more hours in 2018 because there is more work to be done,” he said.