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How Did Biglaw Do in 2012? The Bankers Speak

The legal economy right now is not unlike the economy writ large. People with small or non-existent paychecks are suffering, but those at the top are actually doing just fine for themselves.

This isn’t necessarily a bad thing; it might just be reality. As David Brooks put it in a recent New York Times column, “[t]he meritocracy is overwhelming the liberal project.” He argues that in our current, rapidly changing economy, people who are smart, well-educated, and hardworking just end up doing better and better for themselves — and there are practical limits on how much redistributive policies can “fix” this situation.

Sorry for that digression — back to Biglaw. Let’s take a look at how the rich are getting richer….

These latest results, from the law firm banking group at Citi, actually shouldn’t come as a huge surprise, since they are consistent with prior findings from Wells Fargo, Citi’s big rival in the law firm lending space. But Citi does have a somewhat larger sample size than Wells Fargo — 179 firms for Citi, compared to about 100 for Wells Fargo — so the news is worth noting.

Here’s what Dan DiPietro and Gretta Rusanow of Citigroup write over at Am Law Daily:

The early 2012 results are in: Law firm profits increased by 4.3 percent in 2012, in line with Citi Private Bank’s full-year 2012 forecast. We must admit, though, we doubted our powers of prognostication after reviewing the third quarter 2012 results. But the factors in the fourth quarter of 2012 that drove such a strong finish to the year (very strong collections, a spike in demand, and more moderate growth in expenses) may not be sustainable.

Revenue growth of 3.6 percent in 2012 was largely driven by a push for collections in the fourth quarter. Revenue growth accelerated from the 1.7 percent result for the first nine months of 2012 vs. the same period of 2011. Demand growth during the fourth quarter played some part, reversing the trend we had seen during the first three quarters (when demand growth slowed and then went into a slight decline). However, at a full year demand growth rate of just 0.2 percent, this could hardly be enough to explain the full year revenue result. Part of the answer lies more in the focus firms placed on collections, particularly during the fourth quarter, as we saw the collection cycle shortened by 2.1 percent in 2012 (vs. a lengthening of 1.2 percent we had seen in the third-quarter results).

What’s the concern about sustainability? DiPietro and Rusanow suggest that the strong fourth-quarter finish “may have been a short-term trend, as clients focused on getting work completed before year-end for tax reasons.” As you will recall, in the final days of 2012 we were all concerned about going over the so-called fiscal cliff (which thankfully did not come to pass).

Dewey have an important caveat to these results? Oh yes we do:

[S]urvivorship bias comes into play when a firm dissolves during the period being measured. Because there was a significant bankruptcy that took place in 2012, that firm’s revenue, demand, and equity partner data is removed from the 2011 figures, thereby creating a lower data set for the base year. It’s clear that the bulk of the failed firm’s revenue went to other firms who reaped the rewards in higher 2012 revenue.

While the year-over-year calculations noted above are an accurate portrayal of the results of our sample, it’s important to keep survivorship bias in mind when interpreting the results. If the failed firm’s figures were included in the 2011 data, revenue growth would be reduced by about 1 percent, demand would have been a negative 0.5 percent and equity partner head count would have been a negative 1 percent (all are approximate figures).

Associates did their part to help their firms’ performance. According to the Citi report, profitability reflected a slowing in expense growth, which rested in part on “the slowdown in head count growth and the lack of spring bonuses in 2012.”

What should we expect in 2013? The Citigroup bankers are worried:

Looking ahead, with an inventory growth rate of just 1.7 percent, and only slight growth in demand, we are concerned about the start of 2013. If demand improves as the year progresses — as seems possible given some positive economic signs — then revenue growth could likely overcome any slow start to the year. If the catch up in infrastructure-related expenses has indeed played out, firms continue the spate of recent announcements trimming non-legal staff, and head count increases remain modest, then expense growth will likely slow. However, a lot will depend on the prepayment behavior of firms, and how they handle payment of associate bonuses.

Yikes. If a surprisingly high number of firms pay 2013 bonuses in 2014, don’t say we didn’t warn you. (In 2012, we saw at least one firm push its bonus payments into the following year.)

For additional discussion of the Citigroup report, check out Lee Pacchia of Bloomberg Law interviewing Dan DiPietro (who looks more like a college professor than Biglaw’s biggest banker). The parts of the interview I found most interesting: DiPietro’s statement that his “watch list” of financially troubled firms is actually shrinking, and his comments on how associate layoffs during the Great Recession had some adverse consequences for firms (bad publicity and a dearth of midlevels down the road).

Citi: Firms Posted 4.3 Percent Rise in 2012 Profits [Am Law Daily]
Strong 2012 finish boosted law firm profits to 4.3 percent for year, survey says [ABA Journal]
Citi: Modest Growth is the Legal Industry’s New ‘Good Year’ [WSJ Law Blog (sub. req.)]
A Better 2012 for BigLaw (With Big Asterisks) [Bloomberg Law via YouTube]

Earlier: From the Department of Pleasant Surprises: Biglaw’s Solid Performance in 2012

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