Kathryn Fritz, Fenwick & West partner..Photo by Jason Doiy.9-16-13.062-2013.
Kathryn Fritz, Fenwick & West partner..Photo by Jason Doiy.9-16-13.062-2013. (Jason Doiy)

SAN FRANCISCO ­— Since the economic downturn, California’s legal market has weathered its share of troubles: layoffs, firm failures, sluggish demand, cost cutting, tepid hiring and office closures. The recovery has a way to go before business returns to pre-recession levels, according to many law firm managers.

However, after a slow first quarter when firms saw transactional work drop sharply from the end of 2012, the sector experienced relative—and welcome—stability this year.

Competition in the Bay Area continued to intensify in 2013 as national firms such as Arent Fox and Venable planted flags in San Francisco and Pepper Hamilton and Winston & Strawn opened outposts in Silicon Valley. Meanwhile, Wilson Sonsini Goodrich & Rosati expanded in Southern California, opening the firm’s first L.A. office. All the while, the state’s lateral market was bustling.

Fenwick & West and Orrick, Herrington & Sutcliffe ushered in new chairmen—Richard Dickson and Mitchell Zuklie—ending the lengthy reigns of Gordon Davidson and Ralph Baxter.

Once installed, Zuklie shocked industry peers by exploring a merger with crosstown rival Pillsbury Winthrop Shaw Pittman. However, those talks—which might have instantly produced the largest firm in the Bay Area—collapsed before year-end.

Activity was “choppy” across all practice areas, according to Brad Hildebrandt, founder of Hildebrandt Consulting. “The last couple months have been stronger,” he said.

Kirkland & Ellis partner David Breach agreed the economy “seems be a getting a bit better,” though he added, “not as much as folks would like.”

Still, that momentum bodes well for 2014 and helps explain a brightening outlook from many industry insiders. Law firm managing partners across the country are feeling more optimistic about the year ahead than they were at the end of the third quarter, according to a survey released earlier this month by Citi Private Bank’s Law Firm Group.

Two-thirds of those surveyed said they expected demand for legal services to rise in 2014 and 75 percent anticipated at least modest growth in firm profits.

“That’s pretty far from where we were at the beginning of the year,” said Joan Fife, the managing partner of Winston & Strawn’s San Francisco office. “I was shocked when I saw the word optimistic. For law firm partners to say ‘optimistic’, it’s a pretty good sign.”

With the new year on the horizon, we asked more than a dozen firm leaders and industry consultants to reflect on 2013 and consider what lies ahead—from the economy, to the impact of technology, to competition and client demands. We share some of their thoughts and forecasts here.

HOT­—AND NOT SO HOT—PRACTICES

“We expect an increase in the overall velocity of IPO activity. Securities litigation work would also be expected to increase as a result in the increasing number of IPOs. Privacy, data security and consumer class action work are other areas where we expect to see increased activity in the coming year. When there’s a fertile environment for equity capital markets work, it drives M&A and venture capital activity. When there’s a significant increase in transactional work, there’s litigation work that falls out of that.” — Thomas DeFilipps, Sidley Austin managing partner in Palo Alto

“IP is a critical component of technology and life science businesses. And these businesses continue to be the heart of the innovation across the country. The policy and legal developments relating to IP, such as in the America Invents Act, will continue to make this an interesting practice area.” — Kathryn Fritz, managing partner of Fenwick & West

Technology “has been a noteworthy bright spot, especially against the national backdrop. And that’s driven by a combination of some technology-focused private equity funds. It’s a good financing market.” — David Breach, founding partner of the corporate group for Kirkland & Ellis’ San Francisco office

“Litigation in general will soften as alternative dispute resolution makes additional advances and as the economy gains steam.” — Don Oppenheim, principal at consulting firm Law Firm Profitability Group

“Corporate governance, particularly helping companies avoid expensive and embarrassing problems with Foreign Corrupt Practices Act and other regulatory oversight. Boards will increasingly view it as a priority to be sure their companies have adopted policies and procedures to keep them out of trouble.” — Thomas Kellerman, managing partner of Morgan, Lewis & Bockius’ Palo Alto office

“Privacy practices will be an area of growth in 2014. Data privacy and security challenges are increasing in number, scale and complexity.” — Gregory Nitzkowski, managing partner of Paul Hastings

“After years of quietude, the real estate practice is resurging strongly in nearly all aspects­—acquisitions, exchanges, leases (local and international), and entitlements. Only financing transactions are lagging. Our clients are hiring, expanding, and acquiring—­they need more space.” — Mark Hudak, director chair of Carr, McClellan, Ingersoll, Thompson & Horn’s business litigation group

COMPETING IN A TOUGH MARKET

“In every industry, all over the world, consumer power is increasing. The law is no exception. Firms will need to hone distinctive value propositions and excel even more at their ability to deliver superior results that exceed client expectations for a cost at which clients perceive high value. Drilling those two precepts into the collective mind of the firm is the key to success.” — Peter Zeughauser, Zeughauser Group

Firms should focus on “client relations, building efficient practice areas, learning to work under modified or fixed fees and knowing whether or not they should operate globally.” — Brad Hildebrandt, founder of Hildebrandt Consulting

“Clients have a tremendous amount of information at their fingertips now. Lawyers need to provide that additional layer of value and do it in a way that’s efficient and at a price that’s equivalent to the value we deliver.” — Kathryn Fritz, Fenwick & West

Firms must “develop a strategy for success in a period of flat demand for legal services and then execute meticulously on that strategy. There is less room for mistakes these days than in the past.” — Alan Cope Johnston, managing partner of Morrison & Foerster’s Palo Alto office

“We’re continually looking to improve how we partner with our clients to better deliver the value they have come to expect, and are always refining how we manage projects and what tools we can use to provide the best legal work and the best value. It’s a different way of looking at the same projects. The billed hour is morphing into a different approach.” — Thomas DeFilipps, Sidley Austin

“Contract attorney usage, now so popular, might well become a flop as real jobs grab the good contract folk leaving some firms with a real servicing challenge. Firms should return to the basics by rebuilding cohesion and not only focus on dollars and superstars.” — Don Oppenheim, Law Firm Profitability Group

“Larger firms will need to figure out a strategy to build alliances with third-party providers and otherwise help clients fulfill many of their needs at a much lower price point. Clients don’t care if you’re big, but they do care if you have the services they need when and where they need them.” — Thomas Kellerman, Morgan Lewis

“I think there will be more mergers of firms as they try to find strategic fit and to grow. Growing by onesies and twosies [is] challenging so we will continue to see big firms merging with other big or medium firms that have either a substantive or regional presence that they need to offer a more global and one-stop shop solution to their clients. They may also merge smaller firms with specialized niche practice groups as well.” — Catharina Min, managing partner of Reed Smith’s Silicon Valley office

IMPACT OF TECHNOLOGY

“The development of mobile technology is having a significant impact on the practice of law. For example, email and other types of instant communication have created greater pressure on lawyers to give immediate answers to questions, without a lot of time for research or reflection. This development has put a premium on the type of senior lawyers who can provide thoughtful—but fast­—responses based on good judgment and experience.” — David Berger, member of the board of directors at Wilson Sonsini Goodrich & Rosati and chair of the firm’s policy committee

“Superior technology will become a more important market differentiator over time. Firms who adopt technology that facilitates greater efficiency, more effective internal and external collaboration and improved client service will have a market advantage.” — Greg Nitzkowski, Paul Hastings

“I think we are going to continue to see an increasing division between firms that are able to harness technology to deliver value to clients and those who are not. Lawyers by nature are very resistant to change. But clients are asking law firms to reinvent themselves from within.” — Kathryn Fritz, Fenwick & West

“Knowledge-based systems will become more pervasive and critical to a law firm’s profits and efficiency.” — Donald Reinke, cochair of Reed Smith’s venture capital and technology practice

Contact the reporter at npierrepont@alm.com.