Biglaw

2018 Looks Like Another Year Of Blah For The Legal Industry

Another challenging year ahead for the legal industry.

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That’s the Am Law 50 getting that extra boost there.

Meet the new year, same as the old year.

The Citi Private Bank Law Firm Group and the Hildebrandt Consulting have released their annual client advisory for 2018 and the outlook is the same compilation of tepid optimism we’ve seen for the last few years. Demand is in the tank, partner headcount is flat, and operations are getting leaner.

Something new about this year’s report is how much closer the authors are to just calling out that the gap between the elite firms and the rest is growing at a healthy clip. It’s been a regular factor in the numbers behind every Citi report, yet the narrative always finds a way to dance around coming out and saying, “our data say if you aren’t an Am Law 25 firm, you’re probably screwed in this market.” They’ve still not gotten there, but this is pretty close.

Looking out to 2018, we project that industry revenue growth and profit per equity partner growth will remain in the mid-single-digit range on average. Behind these average results, we expect to see variability in individual firm performance, which will continue to drive consolidation in the industry.

A strong brand will be critical for firms to capture revenue growth in their established markets, practices, and industries. For some firms, further growth in this environment will come from expansion into new markets, practices, or industries. For many, growth will come from laterals or combinations.

Variability, consolidation, and “strong brand.” That’s as direct as it’s going to get, folks. Over the last couple of years, on balance, the path to success in the industry is being one of the very best of the best or being a smaller, more nimble shop capable of delivering quality results to clients at lower prices. Everyone in the middle fills that awkward space of being too expensive compared to their smaller competitors and not elite enough to convince clients that it’s worth the expense. That’s not a winning combination. Obviously there will be exceptions to every trend, but things don’t look great for the Jan Bradys of Biglaw.

Through the first nine months of 2017, the US law firm industry saw revenue growth of 3.6 percent. This has been entirely driven by standard rate increases (4.0 percent) as demand declined by 0.2 percent and collections slowed by 0.9 percent. The demand result is weaker than the 0.3 percent increase the industry saw during the same period of 2016, a year that ended with just a 0.1 percent increase in demand.

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But don’t shed any tears for the Am Law 50, who saw a .9 percent increase in demand while the market as a whole went backward — with the Am Law 101-200 suffering a whopping 2.3 percent decline in demand. Where’s all this work going?

Beyond traditional law firm competitors, law firms will continue to face competition from alternative legal service providers, and from clients. While hard data is not readily available, it does appear that alternative legal service providers are growing rapidly (albeit from a very low base), and they are picking off low-value areas of legal work, thereby depressing demand growth for traditional law firms. In-house law departments continue to grow and keep more work in-house, although some view this as cyclical and likely to move in the other direction in time, as has happened in the past. For now, we note the rapid growth of the Corporate Legal Operations Consortium (CLOC) as evidence of in-house law departments’ continued progress and drive towards effciency. With a vision to provide a “seamless legal ecosystem that delivers corporate legal support to small, medium and large businesses with peak efficiency,” CLOC has become highly visible, and has the potential to bring increased pricing pressure to law firms.

The growth of CLOC certainly proves that clients think they can cull their outside counsel spend and move more work in-house. Certainly technology has advanced to make this a more realizable dream and its piqued a lot of interest, but whether or not that heralds a sweeping, long-term strategy shift or just represents flirtation from clients who don’t want to be out of the loop for the price of $195/year remains to be seen.

One interesting observation, especially coupled with the fact that firms with a strong international presence performed better than purely domestic shops, is the changing center of geographic expansion.

For 2018 and beyond, firms tell us that they see Asia as both a challenge and opportunity. Many firms simply feel they have to be present in China, Hong Kong, and Singapore because of the rapid growth occurring in Asia, regardless of the challenges. We expect further expansion of Chinese firms outside of China. Europe is generally viewed as a challenge with the exception of Paris. London is viewed by many firms as continuing to be an opportunity, though Brexit will pose challenges. Firms with a more robust continental Europe footprint could be better positioned to gain market share as Brexit plays out if some of the business currently done in London leaves the UK. In the US, firms generally point to opportunity in New York, California, Texas, and in Washington DC.

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Finally, the flat population of equity partners is flagged as a growing risk. Too many firms have slowed their equity partner recruitment over the years to control costs and maximize leverage. It was a wise short-term strategy, but one that is now facing the ravages of time, with some 32 percent of equity partners at or approaching retirement age. The loss of such a huge chunk of senior leadership creates succession planning concerns for many. How firms deal with this will be a key development to watch over the next decade:

While this trend underscores the importance of succession planning, it raises questions about the size of the average equity partnership in the future. It also highlights the challenge frms face in retaining their best and brightest lawyers who aspire to become equity partners in an industry where the opportunity to become an equity partner has become slim. While some frms might deliberately shrink their equity partnerships, others are likely to become more focused on flling the gaps created by the slowed additions of recent years and the accelerated departures in the future. They will either do this through acquiring laterals, or increasing the rate of promotions through development of the talent pipeline in their leverage models.

Ultimately, the report ends on a note of muted optimism. The landscape isn’t ideal, but the top firms are growing — slowly — and the rest will end up merging or getting out of the way. After all, the legal industry is historically “resilient” we’re reminded, which is true. But it also feels disconcertingly like one of those statements that’s always true right up until it isn’t.

2018 Citi Hildebrandt Client Advisory [Citi]

HeadshotJoe Patrice is an editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.

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