Law Firm Revenue Is Up Because We’re Just Making People Pay More For Less

It’s not that lawyers aren’t giving individual clients as much dedicated, high-quality work product as they always have, it’s that there’s not nearly as much of that work to go around. But the legal industry is nothing if not resilient when it comes to its own bottom line and firms found a way — yet again — to snatch big bucks from the jaws of declining demand this quarter.

David Altuna and Gretta Rusanow of Citi Private Bank’s Law Firm Group wrote about this phenomenon this morning, based on survey results from 75 Am Law 100 firms, 52 Am Law 101-200 firms, and 60 niche/boutique firms, even though the conclusions could have come from nearly any quarter of the last decade:

The legal industry saw greater revenue growth during the first quarter of 2019 than it did to start the strong year of 2018. However, the drivers of that growth were much different, as the demand growth that characterized 2018 gave way to a demand decline during the first quarter of 2019, and much of the revenue growth came in the form of cash collections from 2018 inventory. Billing rate increases continued at the elevated pace that we saw in 2018, and they retake their position as the primary revenue driver to begin 2019, as they have been for much of the post-recession period.

So much for efficiency-minded clients! Perhaps there was always this much elasticity in high-end legal services, but to hear clients adamantly declare that they will not pay for associate salary increases and invest a great deal of rhetorical energy into legal operations with an eye toward improving efficiency, it creates a bit of cognitive dissonance to see clients forking over more and more money while demand sinks.

For what it’s worth, Altuna and Rusanow identify collections on 2018 billings as contributing to the 2019 revenue spike, but drops in the bucket remain mere drops in the bucket:

Revenue growth of 4.5% in the first quarter of 2019 was driven largely by lawyer billing rate growth of 4.4%, as demand declined 0.3%.

Meanwhile, expenses continued to grow, eating into partner profits and revealing that no matter how inexorable billing rate increases feel, the firms are actually letting the clients off light.

One big surprise from these results is that mid-tier firms — the firms that have been falling farther and farther behind the elite in Biglaw for years — actually had a better quarter for a change:

Looking at the results by revenue size, Am Law 51-100 firms had the best start to the year. These firms saw the greatest revenue growth at 8.1% and were the only segment to see revenue growth exceed expense growth. They also saw the greatest demand growth at 1.2% and saw lawyer billing rate increases of 4.1%. They had by far the greatest shortening of the collection cycle at 3%, and this materially aided their revenue growth. Even so, they also carry a 4.9% inventory increase into the second quarter, the second-largest among the segments.

Can these firms keep up the pace? If the tide has finally turned and clients are again embracing the middle of the pack, that significantly changes the landscape.

But it probably hasn’t. Let’s hold out for second quarter numbers before we go around resurrecting a market segment that’s been hammered for years.

Law Firm Revenue Rose as Demand Dropped in the First Quarter of 2019 [American Lawyer]

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Joe Patrice is a senior 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. Joe also serves as a Managing Director at RPN Executive Search.