Biglaw: Demand Is Slowing, Expenses Are Up

The outlook for law firms isn't all gloom and doom, but there are a lot of caveats to even the modestly good news.

Just when you thought things were looking up, the latest Citi Private Bank Law Firm Group report reminds us again that the road facing law firms is beset on all sides by the inequities of the selfish and the tyranny of evil men… and by that we mean cost-cutting clients.

That’s not to say that Citi’s report is all gloom and doom. It’s just that every silver lining comes gift-wrapped with a litany of troubling caveats.

In this morning’s Am Law Daily, Gretta Rusanow and Andrew Godwin discuss the report’s key findings:

Through the first nine months of 2015, revenue increased 3.6 percent. The key drivers were growth in demand (up 0.6 percent) and rates (up 3.1 percent). Though the collection cycle lengthened 1 percent, this was an improvement over the 1.5 percent lengthening reported during the first half and contributed to the improvement from the 3.3 percent revenue growth we reported for the first six months of the year.

Does everyone remember the classic Simpsons scene where Homer is offered frozen yogurt for buying a cursed monkey’s claw?

That’s pretty much this report. Revenue is up over last year. That’s good! Almost the entire increase is due to jacking up rates. That’s bad. At least demand is still growing (ever so slightly). That’s good! It’s down from nearly 2 percent last year. That’s bad.

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Well, revenue is outpacing expense growth:

At the beginning of this year, we predicted stronger expense growth than last year, and this was reflected in the nine-month results. Though it’s positive to see revenue growth outpacing expense growth, we saw expense growth gain momentum during the third quarter. Total expenses grew 3.3 percent, up from the 3.1 percent growth reported during the first half, and stronger than the 2.4 percent seen during the same period last year. Compensation expense growth (up 4.3 percent for the first nine months) was the principal driver, with lawyer head count growth, increased bonuses and a likely shift to a more senior demographic as contributing factors.

That’s good!

While lawyer headcount growth of 1 percent contributed to expense growth, it exceeded total lawyer billable hours growth of 0.5 percent, resulting in a productivity decline of 0.5 percent through the first nine months of 2015.

That’s bad.

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Most troubling to those of you still itching for another round of Biglaw raises in the top markets is the fact that the Am Law 50 firms who drive such upward adjustments show the lowest revenue growth of any of the segments Citi surveyed and boast only 0.4 percent demand growth through the first 9 months, as opposed to 2.4 percent growth over the same period a year ago. That’s not a recipe for partners opening their wallets — except, perhaps, in smaller markets — so don’t go getting your hopes up for that $190K when handing out discretionary bonuses will placate the masses without saddling the firm with a recurring expense.

Now just how big the bonuses will be this year is a whole other question. If you’re lucky they might come with a free Frogurt.

Citi Report: Law Firms Face Slowdown in Demand [American Lawyer]