As noted in Morning Docket, Citi’s quarterly review of the financial landscape facing law firms just came out. The surface level verdict is — as it has been for some time — slow and steady, with a bunch of red flags.

The firms are happy to see positive revenue growth, even if it’s only 2.7 percent. I mean, other industries aren’t so lucky. But when the industry is a few years into the “New Normal” and analysts are still pointing to the same failings, it’s hard to feel too optimistic.

Let’s look at the other highlights of the report:

  • First, revenue has cycled up over the course of the year? No kidding. Collections always pick up as the year goes on as the firms start cracking down on deadbeat clients. Still, some partners need a paddlin’ for taking their sweet time between logging work and sending out bills.
  • Second, demand is up in the third quarter. Yay! But this is just like winning the third quarter of a football game — demand is still down for the whole year relative to last year. It’s coming down to the fourth quarter and it doesn’t look good because, as we’ve pointed out, the drop in demand for firms may not reflect a drop in demand for services, but rather general counsel turning away from the big firms (while some smaller firms are included in the report, the Am Law 100 swamps them).
  • Revenue is finally outpacing expenses after 9 months. That’s certainly not good news from a profitability perspective. Indeed, compression on profits remained. When you break it down, you can see the easing reflected in the report was attributable almost entirely to one small segment of the population. More on that group later.

And it’s not all higher billables getting firms over the hump of expenses:

While revenue growth picked up as the year progressed, expense growth slowed, from 3.4 percent in the first quarter to 2.3 percent after nine months, easing the pressure on margins. Although growth in both components of expense — attorney compensation and operating — decelerated during this time, attorney compensation experienced the greater slowdown of the two. The primary reason for this compensation slowdown was a decrease in attorney head count growth. Up 0.5 percent after three months, total attorney head count was up only 0.1 percent after nine months, and the rate of attorney compensation expense growth fell accordingly.

As firms were paring back the growth in attorney head count, they continued to tightly control equity partner head count, which was actually down 0.3 percent through nine months compared to the same period last year.

So attorney head count is still up, but growing more slowly. Not to sell fellow lawyers down the river, but if demand is down, attorney head count probably should be negative. Indeed, only one segment of the legal world endured negative head count, and they’re the only ones seeing an increase in productivity:

With demand down relative to last year and head count up, however slightly, productivity for the industry as a whole continued to slide. The Am Law 1-50, however, did manage to keep productivity flat, while the global firms (which are essentially, but not exclusively, a subset of the Am Law 1-50) actually experienced an increase in productivity. Not only did these global firms have the only increase in demand through nine months, they also had the only notable reduction in lawyer head count.

So celebrate today’s modest revenue growth. And start brushing up your résumé, because the landscape certainly suggests layoffs are in the offing.

Citi: Firms’ Revenue Rose 2.7 Percent in Third Quarter [Am Law Daily]

Earlier: Buying In: The Biglaw Collection Machine
General Counsel Increasingly Dumping The Top Biglaw Firms


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