The nine-month numbers are in, and law firms are still making money.
To be a little more specific, the Citi Private Bank Law Firm Group collected data from 190 firms and found that revenue continues to creep up, prompting victory laps around the law firm world. That expenses grew almost as much is a trifle.
At least expenses didn’t swamp revenue growth, so that’s good! Revenue growth clocked in at 5.1 percent over the first nine months while expenses grew by 4.7 percent. Conveniently, 4.7 percent was also the portion of revenue growth driven by billing rate growth so we’re pretty much just making clients pay more and calling it growth. That sounds sustainable!
Looking at the results by revenue size, Am Law 51-100 firms continued to outperform other segments in revenue and demand growth, up 5.8% and 1.8%, respectively. While the collection cycle lengthened for these firms, Am Law 51-100 firms also had the highest inventory growth (at 7.5%), setting them up well for a strong end to the year. Am Law 1-50 firms may have trailed Am Law 51-100 firms in demand growth, but in another positive trend this year, we have seen demand performance for these firms continue to improve throughout the year, up 0.8% for the first nine months—much better than the 0.7% decline we saw during the first quarter. Am Law 1-50 rate increases continued to outpace other segments, up 5.2%, helping to drive the 5.4% growth in revenue (second only to the Am Law 51-100 firms), and in spite of the 1.6% lengthening of the collection cycle. With strong inventory levels (up 7.1%) for Am Law 1-50 firms, the outlook for the rest of the year is very positive.
That’s actually an interesting development since the growing gap between the Am Law 1-50 and 51-100 has defined the last several years. These numbers suggest that the second 50 have gained some traction.
Of course, this all depends on the bottom not falling out of an economy that looks increasingly like it’s been juiced up. General counsel are already predicting the recession and planning to cut back on costs — not great when demand is already stuck in molasses. Firms have quietly been stockpiling bankruptcy talent throughout the year because they know what’s coming.
Another lesson of the first nine months is that bigger remains better, with global firms performing better than the rest of the legal landscape:
National firms saw solid revenue growth (5.6%), driven by a combination of 1.4% demand growth and 3.8% rate increases. Inventory growth of 5.9% signals a strong year-end.
Regional firms were the only segment to continue to see a demand decline, though it moderated from the 1.3% decline reported for the first half, to 0.5% decline for the nine-month period. Revenue growth of 3.5% trailed all segments, far below the 4.2% growth in expenses. Looking ahead, 6.2% growth in inventory means that there is opportunity for these firms to see a decent end to the year.
While the report concludes by trying to put a happy face on all this, it’s getting harder and harder to feel good about revenue growth driven almost entirely by just asking clients to pay more. That’s a business model that doesn’t bode well when clients have to start tightening their belts.
Next year could get ugly.
Law Firm Revenues Rise as Demand Accelerates, Citi Reports [American Lawyer]
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.