2015 Was A Weak Year For The Legal Industry... And You Should Expect More Of The Same In 2016
As 2015 draws to a close, 2016 looks to be a weak year for law firms.
Wasn’t 2014 great? By last year’s end, firms had regained their confidence, growth was up, and some began to whisper that the legal industry’s woes were finally behind them.
Alas, as they say, “psych.” As 2015 wore on, it became increasingly clear that 2014 signified very little and that the truth of the new normal remains that Growth Is Dead (affiliate link). Well, maybe not dead, but certainly stagnant across the industry as a whole, while dispersion and volatility are on the rise. Sorry for the lump of coal, lawyers!
The Citi Private Bank Law Firm Group and Hildebrandt Consulting just released their 2016 Client Advisory, and its findings are less than happy:
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After annual profit growth rates of roughly 10% from 2001 to 2007 and then the severe downturn and dislocation that occurred in 2008 and 2009, average growth rates from 2010 to 2013 were in the low single-digits. Although low single-digit growth seems mild compared to the highs and lows of 2001 – 09, it’s actually similar to typical growth rates seen before that period. From that perspective, 2001 – 07 and 2008 – 09 were both aberrational periods. In hindsight, 2014 is also now looking aberrational with its relatively higher growth rates, especially since 2015 appears to be on track to finish with similar growth rates to those seen during 2010 – 2013 (unless there’s an unusually large surge in fourth quarter collections).
Buckle up for low single-digit growth unless Santa breaks some kneecaps before year-end. This isn’t much of a surprise after Citi’s 3Q report revealed slowing demand and rising expenses. But averages can mislead, and this report found that there’s a growing gap between firms when it comes to bringing in the revenue and from year to year:
Behind the post-recession industry averages, we have seen dispersion in demand performance (a key driver behind revenue performance) of firms across the industry. Chart A shows that approximately half of the firms reporting to us showed an increase vs. a decline in demand from 2009 to 2014. This has continued through the first nine months of 2015. The fact that demand has increased for some firms means that there is work to be had. In a hypercompetitive market, it suggests that these firms have managed to differentiate their brands from others.
We’ve also seen increased volatility in the demand results of firms from one year to the next. A firm that sees demand growth one year could very well report a decline the next, and vice-versa. In Chart B, we see increased year-over-year volatility in recent years. Indeed, some law firm leaders have told us that they are framing annual results in the context of the firm’s performance over at least a two-year period. Keeping a healthy perspective is particularly necessary in a volatile market.
That right there explains why these Biglaw bonuses are flat even in firms that outperformed the industry average this year. When firms fear their numbers might evaporate next year and measure success in two-year increments, flat year-over-year bonuses make a lot of sense. And the report also cautions against jumping to the conclusion that “dispersion” means elite Biglaw firms outperform the rest of the pack, which has always been the case. Indeed, it’s the growing gulf between those firms with comparable numbers before the recession that the report focuses on. The legal world is reordering itself, and every firm needs to figure out how to adjust.
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The Client Advisory also explains how dispersion and volatility could form a feedback loop:
However, for firms that have seen declining PPEP over a longer period of time, or a widening gap to other firms, there is a risk that high-performing partners start to move to stronger-performing firms. Beyond being a prime target for lateral hiring, a firm may become a full-fledged acquisition candidate, or risk dissolution.
Personally, I think this highlights the looming long-term folly of snapshot PPP-centric benchmarking: partners are increasingly hired guns and have every incentive to cut into bone and over-leverage to bring up their shares before jumping ship and leaving a firm weaker in their wake. Profitability is one thing, maximizing PPP in a given year is another. But what are you going to do? Especially when the short-term outlook provides so much to worry about already.
If this sounds like troubling news for 2016, you’re right:
We expect 2016 performance will be consistent with 2010-2013 performance levels. With more modest demand and inventory growth anticipated by the end of 2015 compared to the end of 2014, however, 2016 likely will start off with revenue growth challenges. Most of the growth will continue to come from transactional activity rather than litigation, while firms with a global footprint will likely continue to benefit from the opportunities presented by an increasingly global market.
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Look, it’s getting harder out there. If a firm wants to be on top when the dust settles, it needs to adapt, recruit, rethink, technologically advance, and better understand its clients. The days of coasting on reputation are behind us for all but the most elite of elite firms. The struggle for revenue begins anew every day.
But Citi strikes a note of hope in conclusion:
Despite the challenges that law firms have been facing in this post-Great Recession environment — soft demand, greater client expectations, increased competition — and the pronouncements of some doomsayers, we believe most firms are making the changes necessary to deal with what will likely be the new reality for the foreseeable future. And while the return of double-digit growth rates for the legal industry is unlikely, there’s a lot to be said for steady, if unspectacular, low single-digit growth rates, especially if softness in demand continues.
Oh? There’s “a lot to be said for… low single-digit growth rates”? True, but I’m pretty sure most of it would have to be bleeped out.
2016 Client Advisory [Citi Private Bank Law Firm Group]
