Downtown Los Angeles. Photo: Shutterstock.com

Law firms in California and the Pacific Northwest flourished last year thanks to strong demand, reporting the highest 2018 revenue growth among nine regions surveyed in a recent report.

According to a year-end check-in survey conducted by the Wells Fargo Legal Specialty Group, law firms based in Northern California and the Pacific Northwest experienced revenue growth of 7.4 percent from 2017 to 2018. Following close behind, Southern California law firms saw revenue growth of 7 percent, said Wells Fargo Legal Specialty Group senior director of sales Joe Mendola, which was second highest among the regions surveyed.

Both groups of firms exceeded industrywide growth of 5.9 percent, said Mendola.

However, in terms of profits per equity partner (PEP), the two West-Coast regions reported divergent results. Firms in Northern California and the Pacific Northwest reported a 12.4 percent increase in PEP last year, while Southern California law firms said their PEP was only up by 4.6 percent—far below the overall national average of 8.1 percent.

“The explanation for that [is] we don’t ask the firms to provide us the change in head counts,” said Mendola. “However, when your net income is up by 7.5 percent and your profit per equity partner is [up] 4.7 percent, clearly the denominator increased—the number of equity partners in the region increased—and that diluted the income growth.”

Net income growth for Northern California and Pacific Northwest firms was up by 11.8 percent. Meanwhile, Southern California firms grew net income 7.5 percent, almost equivalent to the overall industry average of 7.6 percent.

In the two West Coast regions, 25 law firms—14 in Southern California and 11 in Northern California and the Pacific Northwest—participated in the survey.

“A lot of the larger firms, their expenses were impacted by the associate salary increase that occurred,” said Mendola, explaining the lower net income growth in Southern California. “When you think of Southern California, there are a large number of Am Law 100 firms that would have fallen into that bucket.”

Demand growth in both regions was above the industry average of 2.3 percent. In the North, firms saw demand increase by 4.1 percent, and in the South, demand grew by 3.2 percent.

“If you look at California in totality as a region, the performance was really strong and it looks like that trend will continue based on the inventory level,” said Mendola, “at least into the early part of 2019.”

Firms’ inventory—representing total accounts receivable and unpaid time—was up by 10 percent in Southern California last year. Meanwhile, Northern California and the Pacific Northwest region saw its inventory grow by 8.9 percent in 2018.

Looking ahead to 2019, Mendola said firms in Northern California are forecasting revenue growth of 4.5 percent, while Southern California firms have a less optimistic forecast of 2.5-percent growth. Nationally, the 150 law firms Wells Fargo surveyed forecast revenue growth at 4.4 percent.

Nationwide, billing rates increased steadily in the 4 to 6 percent range last year, Mendola noted. In the year ahead, Northern California and Pacific Northwest firms expect rate increases of 4.7 percent, while firms in Southern California forecast a 4.8-percent increase in billing rates.

“There is a lag in terms of how a recession would impact the results,” said Mendola. He explained that law firms in both regions are predicting a lower revenue growth next year because they are paying close attention to a number of unsettling factors, including stock market fluctuations, interest rate volatility, international trade policies and Brexit.

“All of which are going to impact the sentiment people have to do business and do deals,” he added.