I was recently chatting with a young litigation partner about how the year was going for his firm thus far. He confessed it was off to a sluggish start. He was not extremely busy himself, but he said that his colleagues on the transactional side were practically twiddling their thumbs.

He wondered: was this slowness specific to his firm, or was the legal industry in general not exactly going gangbusters? I shared with him my sense, admittedly anecdotal, that 2013 to date has been pretty “meh.”

Now we have actual data on the first quarter. My partner friend should be relieved. Misery loves company….

Misery might be too strong a word. But according to John Wilmouth, senior client advisor at Citi Private Bank’s Law Firm Group, demand for legal services in the first quarter of 2013 was tepid. Here’s what Wilmouth wrote over at Am Law Daily (via Morning Docket):

First-quarter legal industry results aren’t necessarily the best predictor of the coming year’s full performance, but it’s still discomforting when a year starts off slowly, even when it’s anticipated. The surge in demand and collections during the last quarter of 2012 — due in part to tax-driven transactional work — helped produce decent results for fiscal year 2012 but robbed 2013 of a running start, since revenue that ordinarily might have been booked in 2013 was accelerated into 2012. With 2012 year-end inventory consequently up only 1.7 percent (compared to an 3 percent the previous year), we anticipated a slow start to 2013. Even so, a 0.2 percent first-quarter increase in revenue (compared to 1.2 percent in the comparable quarter last year) was disappointing.

We noted the strong 2012 performance back in February. Maybe it’s nice that deal lawyers who had to work hard over the holidays are getting a bit of a break. But some of them are probably ready to get back into the trenches.

On the bright side:

Fortunately, the expense story is better than last year’s. Although the first-quarter 2013 expense increase of 3.4 percent was greater than the 0.2 percent revenue increase, putting pressure on margins, it was still much less than the 5.9 percent expense increase and comparatively greater margin pressure (5.9 percent expense increase versus 1.2 percent revenue increase) of last year’s first quarter that put early 2012 in such a deep hole.

The good news on the expense-management front is consistent with the anecdotal reports from the field. Firms are openly conducting staff layoffs and voluntary buyouts. More quietly, they are letting go of underperforming associates and partners. And they’re doing other things to manage expenses too, like cutting off fresh flower deliveries.

Those lawyers who survive the culling can do pretty well for themselves. According to the Citi data, “54 percent of law firm leaders indicated they had increased associate bonuses, while only 20 percent reported reducing them.” One can probably thank the higher Cravath bonus baseline for that.

What can we expect for the rest of 2013? Here’s the bottom line from Citi:

As we look ahead to the rest of 2013, it’s hard not to dwell on the 3.3 percent drop in first-quarter demand, despite our own warning that first-quarter results are not necessarily good predictors of full-year results. Fortunately, with relatively strong effective rate increases and only modest expense increases, the industry seems to have positioned itself to mitigate against the impact of another year of soft demand. If demand does indeed pick up, however modestly, as signs of life in the economy would seem to indicate and as law firm leaders have told us they believe will happen, then the legal industry should be in for a better year than these first-quarter results suggest.

Hope springs eternal. As you may recall, managing partners were optimistic at the end of 2012, and nobody wants to admit that they’re wrong before they have to.

Let’s hope that Biglaw performance gets better, in a big way, in the months ahead. You’re tired of reading about, and we’re tired of reporting on, all the voluntary buyouts, staff layoffs, and stealth layoffs.

It’s high time for happier news. We’d all like to smell the flowers again.

Citi Study: Law Firms Hurt by Weak First Quarter Demand [Am Law Daily via Morning Docket]

Earlier: Do Managing Partners Need Mood Stabilizers?
How Did Biglaw Do in 2012? The Bankers Speak


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