The annual report from the Citi Private Bank Law Firm Group is here to break down the financial fortunes of the legal landscape. Did the report reveal any exciting curveballs that will turn the industry on its head and leave firms scrambling to adapt to a new paradigm?
Nope!
No, the 2017 report provides us exactly what we’ve heard every quarter on the quarter for years. Demand is stagnant, billing rates are up, this results in a mildly positive year overall, but ultimately any good news is almost entirely off the backs of the most elite firms and the specialized boutiques while the rest of the Am Law 200 limp along with their growing market weaknesses obscured by the moderately happy top line. The premier industry barometer is looking more like a broken clock that strikes “modest growth” every quarter.
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Revenue growth of 4.5 percent was greater than the 3.8 percent growth seen the previous year. Lawyer billing rate increases, improved accrual realization and improved demand (total timekeeper hours), drove revenue growth, which was tempered only by a slowdown in collections.
There’s that improved overall revenue driven by billing rates. Remember when clients threatened that they were finally putting their foot down and refusing to countenance higher rates? That was funny. Top firm billables are as elastic as Laffy Taffy.
A pickup in demand in the fourth quarter also helped to redeem what had been a sluggish year. Demand ended the year up 0.7 percent after being down 0.2 percent through nine months, and compares quite favorably to last year’s 0.1 percent growth.
And there’s the sad demand figure. It’s truly telling when an industry is excited about demand growth under 1 percent. Here’s a quiz: is that passage from the 2017 report or the 2016 report?
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Dispersion in performance was also evident between industry segments, based on revenue size. Am Law 1-50 firms outperformed the other segments in revenue, net income and PPEP growth for the second consecutive year. They tied niche/boutique firms for the largest demand growth (1.7 percent), and had the strongest growth in year-end inventory (8 percent), putting themselves in the best position for collections at the start of 2018. And this growth was enjoyed by the largest proportion of firms of any of the segments—with 68 percent reporting growth in demand (up from 53 percent in 2016) and 87 percent in PPEP (up from 83 percent in 2016).
The experience was very different for Am Law 51-100 and Second Hundred firms, which both experienced comparatively weaker billing rate increases along with declines in demand. Indeed, half of the Am Law 51-100 firms reported declining demand, while 60 percent of Am Law Second Hundred firms experienced a decline.
What do you know, the Am Law 51-200 generally took it in the shorts? It’s almost like we’re seeing a trend away from the high overhead model and toward specialized boutiques and increased in-house coverage — both fueled in part by technological advances that allow fewer lawyers to handle previously labor-intensive work — while the most elite firms reap the benefits of clients doubling down on the best in the event they do seek a larger outside counsel experience.
This is why we need the Big 4 to swoop in as the avenging angel of death to feast upon the souls of the Am Law Middle. To see them driven before PwC and to hear the lamentations of their managing partners.
It’s not going to be pretty, but it’s pretty clear that we’ll be writing this exact column every quarter until something drastic happens.
Citi Report: Strong Fourth Quarter Pushes 2017 Financials Past 2016 Results [American Lawyer]
Earlier: Twilight Of The Law Firms: The Big 4 Are Poised To Conquer The Legal Landscape
Joe 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.