The UK Addition to the Three Hundred Pound Chinese Swiss Gorilla

Coming not long after the disappointment of NOT announcing at their partners meeting in Hong Kong this past March the anticipated merger of King & Wood Mallesons with WongPartnership, KWM is now expected to vote on a merger with SJ Berwin, a UK firm established by Stanley J Berwin in 1982. The effective date is speculated to be July 1.

SJ Berwin would lose its name but would be one of four financially distinct partnerships under KWM’s Swiss Verein setup, now including partnerships in China, Hong Kong and Australia, any of which could veto the arrangement.

For those of you not yet familiar with either KWM or the Swiss Verein legal services structure, a few words on the basics: King & Wood is the made-up name (there is no Mr. King or Ms. Wood–the founding partners simply considered the names attractive for international marketing purposes) under which a group of five Chinese lawyers started practicing law together in China in 1993. Almost twenty years later, they numbered over 1000 lawyers in 16 offices with annual revenue increases over the prior ten years averaging 20-30%. In March 2012, King & Wood merged with Mallesons Stephens Jacques, an Australian firm, giving the combined firm global revenues of over $650 million, 1800 lawyers and the 2012 Lawyer Award for International Firm of the Year.

KWM is headquartered in Hong Kong, with offices in Australia, China, Japan, the United Kingdom, and the United States, including Silicon Valley and New York City. It is the only law firm currently licensed to practice Australian law, Hong Kong law, Chinese law, and English law, and is the largest law firm that is headquartered outside of the US or the UK. Its strategic plan clearly includes substantial inroads into Anglo-Saxon territory and the next news is likely to be which US firm it adds to its stable. Many consider KWM the 300 pound gorilla that will create huge waves in the international legal services business–providing Asian expertise internationally in a critical emerging market at below-US-rates.

The Swiss Verein structure refers to a Swiss-based arrangement of independent but related business offices that is easily established. These offices form essentially an alliance that keeps financials separate in the various partnerships, blurring the typical reasons for merging–consolidated costs and cross-selling revenues. The form is often used by multinational professional firms to limit global liability. Because control of the firm is decentralized, offices are only bound by regulators in their own country. Non-US offices of accounting firms in a Verein structure, for example, are not bound by SEC subpoenas. Firms that use this structure include Baker & McKenzie, Deloitte, Crowe Horwath, DLA Piper, Hogan Lovells, Norton Rose and SNR Denton, among others.

Whether this sort of association is sufficient to enhance revenues or profits of individual partners is yet to be seen. But the arrangement reduces risk and minimizes management conflicts among the partnerships. Having said that, Mallesons’ Australia managing partner Tony O’Malley has recently announced a fairly abrupt leaving after a fairly short stint, with little explanation.

SJ Berwin evidently entered into talks with KWM late last year. Over the last couple of years, SJ Berwin failed to merge with New York’s Proskauer Rose, discussed a merger with Mayer Brown, saw its revenue and partner ranks remain static and most recently “reassessed” its capital structure, while paying out partner distributions late due to “increased profitability,” and evidently decreased cash flow management, as well.

The KWM gorilla will upon this merger, if it happens, be one of the largest firms in the world, both in terms of lawyers–at over 2300–and revenues, projected to be in the neighborhood of $1 billion.

Evidently one of the reasons Mallesons decided to merge with King & Wood is the perception that “China is the United States of the 21st century.” And its law firms are the biggest new thing on the block.

Only Slightly Higher Hopes

By Ronda Muir on May 16, 2013 Posted in Business Development, Client Service, Decision-Making, Leadership, Management, Productivity, Profitability, Risk Management, Uncategorized

Our last post reported on Citibank’s first quarter financial analysis and noted that in spite of “alarmingly low” growth in demand currently, managing partners of mostly AmLaw 100 firms were exhibiting an unusual display of optimism: they expect overall demand for legal services to increase this year. A more nuanced snapshot of managing partner expectations was released Wednesday with Citibank’s Law Watch Managing Partner Confidence Index, which asked 65 managing partners for ratings with respect to 10 areas of this year’s first and second quarters using a 200 point index.

Although confidence in the economy at large did increase from 119 to 125, compared to last year’s 4th quarter report, which saw an even bigger 18-point jump from the prior report, the MPs’ assessment of the prospects for demand for legal services for this year actually dropped 14 points to 135. Not a low number, but certainly showing lower expectations in this one area compared to last year, primarily in the degree of growth, with those predicting less than 3% prevailing. Concomitantly, “confidence that profits would increase in the year ahead dropped five points to 95, while the outlook for revenue growth fell by 11 points to 102.”

Nonetheless, overall confidence levels were only slightly below last year’s–113 compared to 115. The economy will improve but it won’t necessarily translate into higher demand for legal services or into profitability.

A look at last year’s 4th quarter report gives us a little perspective on how good these leaders are in the forecasting department. Overall confidence registered in the 4th quarter averaged 115, a 13-point increase from the previous quarter, with confidence as to future demand for legal services increasing 12 points to a fairly high 149. A confidence level that proved to be not well-founded, as it turns out.

Maybe there is a little too much buoyant froth at the managing partner level generally, or maybe we are just slow in digesting what’s happening at the moment. Optimism is not usually a hallmark of lawyerly thinking, but then awareness isn’t either.

Results for 2012 were largely unremarkable. As the top NLJ 20 have reported, 5 firms had 5% or more higher revenue than they did in 2011, 9 had slightly higher revenue, and five reported drops or no change in revenue. So at the end of last year we were primed for higher growth in 2013.

So far, that’s not at all what we’re seeing, and the positive expectations for the rest of the year are tempering accordingly. Regardless of what actually happens in the legal marketplace this year, it will be interesting to see whether we have a realistic handle on our future.

Coming Into 2013 with Lower Demand and Higher Hopes

By Ronda Muir on May 9, 2013 Posted in Business Development, Management, Productivity, Profitability, Risk Management

First quarter 2013 results obtained from 166 firms included an “alarming” drop in demand of 3.3% from the comparable quarter for 2012, according to Citibank’s Law Firm Group. Lower revenues this year had been anticipated because of last year’s push to capture revenue ahead of 2013′s tax increases. And revenues were in fact lower, just much lower than even those anticipated–only increasing 0.2% compared to last year’s first quarter increase of 1.2%.

Strong cash collections and higher rate increases (4%, the largest since 2008) evidently helped offset the drop in demand. Without those mitigating factors, there might have been an overall revenue decrease. By type of firm, international firms had the larger drop in revenue, but domestic firms had the larger drop in demand, which they softened with stronger collections. Another positive factor was that expenses rose at a lower rate than last year–3.4% compared to last year’s 5.9%. Although realization rates are expected to be at historic lows.

Head count grew modestly at .5% compared to last year’s 1.6%, but productivity deteriorated by 3.7%, reflecting an average of 1,607 hours annually compared to 1,669 last year. So in spite of rising rates, the oversupply of unproductive attorney hours suggests that there is going to be increasing pressure to discount fees, as Citi points out.

In spite of all this dour news, two-thirds of leaders from 57 law firms (36 Am Law 1–50 firms; 12 Am Law 51–100 firms; seven Second Hundred firms; and two others) said they expect overall demand to increase this year. Citi is relatively optimistic about the international firms: “it’s the firms with the greater international presence that have done a better job positioning themselves for greater success in the remainder of this year,” citing their more efficient operations, higher inventory and higher rate increases.

Modest but nonetheless optimistic forecasts for the US economy may support the firm leaders’ confidence but the turmoil in Europe and the unsteady “recovery” to date make these projections unreliable. There is just as much possibility that the traditional law services model that most of these firms embody is on a course of slow but steady erosion that hasn’t yet hit these canaries.

Stay tuned.

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Emotion at Work: More on Anger, Crying and Gender

By Ronda Muir on April 12, 2013 Posted in Emotional Intelligence

We published an entry on “That Old Crying Feeling” in 2011 that won the BlawgWorld Pick of the Week, and generated a lot of hits and discussion about displaying emotions in the office. We noted, among other things, that Michael Page International had found that mounting stress of all sorts leads one in three lawyers to cry. Here’s some additional gloss on that entry.

In researching her book It’s Always Personal: Emotion in the New Workplace (Random House 2012), Anne Kreamer interviewed 200 people across the country and used 2 surveys to overlay large amounts of data onto her more idiosyncratic interview information. She found that men and women at all levels of management report crying on the job–41% of women and 9% of men said they’d cried at work during the previous year–and that it had made no difference in their career success. Kreamer says it is imperative that in order to be our best, we must access our emotions in our work. She defends women crying by contending that tears are often indicative of empathy and compassion, or come as a result of women being disadvantaged or taken advantage of. See an interview with her here.

There are of course biological explanations for why women cry more—smaller tear ducts and more prolactin, a hormone related to crying–which we mentioned in our previous entry. But perhaps the most interesting piece of information that Kreamer found is that male managers reported being fine with female employees crying, while female managers were much less tolerant.

Other research on gender and emotions has found that, contrary to what we expect in the United States, men and women do not differ in how much emotion they experience every day, but they do differ in which emotions they experience and to what extent and how they express those emotions. Women were found to experience more sadness and other negative emotions than men but comparable levels of anger. And women were also found to express their feelings more frequently than men, which may make them appear more “emotional.” In particular, they express anger verbally.

On the other hand, men are more likely to suppress the expression of their emotions, and if they express anger, they are more likely to do so behaviorally, by acting out in an aggressive way or turning to alcohol or drugs, for example. These differences are attributed by the researchers to differences in the social status of men and women, with women usually at a lower status and therefore experiencing more taxing, powerless circumstances, and also to differences in the cultural expectations of appropriate gender behavior—good girls don’t act aggressively.

Without giving all the footnotes, it should be pointed out that recent research also indicates that women are more aware of their own and others’ emotions and pay more attention to those emotions compared to men, and women show “more complex conceptualizations of emotion, with a greater understanding of what emotions they or others would feel in different contexts and why.” That is, women are more likely to be empathic to those around them. And women are more likely to remember events and recall memories in terms of their emotional content than men do. Finally, women are more likely than men to see their emotions as providing useful information that is important to analyze.

Unfortunately, all this empathy and understanding may not be enough to always earn these more “emotional” women a place in the hearts of those they work with. Particularly, it appears, in the hearts of women. Still, research shows that most underlings do not take kindly to their female leaders in particular expressing sadness or anger. Those who do are judged to be less competent regardless of their actual level of competence or rank. Women leaders are rated lower on leader effectiveness when expressing either anger or sadness versus no emotion, and professional women, despite their rank, who express anger are consistently seen as less competent than angry men and unemotional women. However, men are rated the same on leader effectiveness when expressing either anger or no emotion, but lower when expressing sadness. And a woman expressing anger is perceived as an angrier person with less control than a man expressing anger. The take-away is that anger is considered a gender appropriate domain for men but not for women.

Sheryl Sandberg’s consciousness- and controversy-raising new book Lean In: Women, Work and the Will to Lead (Knopf 2013) has produced debates about the Facebook CEO’s assertion that it’s okay to cry at work. Crying happens, she says, and emotions are hardwired into our psyches as survival mechanisms. With the lines between professional and personal increasingly becoming blurred, she contends that it’s no wonder, and nothing to be ashamed of, that emotions make their way into the workplace. And that’s from a woman.

A recent survey found that being an associate in a law firm tops the 10 most unhappy jobs in the US (followed not far behind by legal assistants). That conclusion was based on polls of more than 65,000 employees all over the country who were asked to evaluate ten factors that affect workplace happiness, including their relationship with their boss and co-workers, work environment, job resources, compensation, growth opportunities, company culture, company reputation, daily tasks, and control over their work. Associates were the most unhappy.

If that survey has any validity, we may see more crying in the office. Hopefully both the women and the men will be understanding.

Culture and Competence

By Ronda Muir on March 26, 2013 Posted in Client Service, Communication, Culture, Emotional Intelligence, Management, Professional Development, Recruitment, Retention

The Center for the Study of the Legal Profession at Georgetown University Law Center and TAGLaw recently published a survey showing the value of their culture to the growth strategies of mid-sized law firms. First, these high-culture awareness firms view culture as a key factor in attracting laterals, with 70% of the firms ranking it as one of the top two factors. (Coincidently, these firms registered a very high success rate with lateral hires—92% report that the majority of their firm’s lateral hires work out.) And secondly, these firms are cautious about laterals and mergers for fear of losing their culture–90% prefer organic growth over only 57% who rely on lateral growth and 19% on mergers.

Which doesn’t mean they don’t grow; in fact, the reverse is apparently true: “The firms in our survey that are growing the fastest were the same ones that are most careful about their human capital,” commented Lisa Rohrer from the Center for the Study of the Legal Profession.

“What this survey taught us is that the culture of a firm is an asset that can be used both to attract the right talent and to preserve a firm’s independence,” said Bob Sattin, president of TAGLaw.

Another development from the Center for the Study of the Legal Profession at Georgetown University Law Center is their publication last year of paper on identifying associates likely to be partners. The paper Developing Lawyers for the Future: What Can We Learn from the Fast Trackers? examines the attributes of associates that make them successful.

As the article notes, “law students continue to be hired most commonly based on the law school they attended and their GPA, under the assumption that law school and GPA are related to future performance as an attorney. Transcript and resume review are typically accompanied by a series of thirty-minute interviews consisting of questions that vary from candidate to candidate. Consequently, hiring decisions result from a combination of the reputation of the law school attended, GPA, and the interviewing partners’ gut feeling… Recently, however, law firms have begun to recognize that knowledge, GPA, and attending a high-status law school are not enough to predict success as an attorney. This realization has led to more of a focus on ‘competencies’ and their impact on job performance…This research indicates that behavioral competencies—such as leadership, interpersonal, task-oriented, and communication-related competencies, rather than technical competencies that are unique to a particular industry or occupation—tend to have a high impact on work performance.”

Some competencies the study found among the successful associates, like core legal competencies and a drive for excellence, aren’t much of a surprise. Others, such as the ability to work in teams, being persistent and flexible, and working through fears and anxiety, are more so. Two attributes that signal self–confidence—“self-efficacy” or believing oneself to be competent and “internal locus of control” or feeling personally responsible for one’s progress—predicted strong results in teamwork, client service and communication. Of particular note is the comment that successful associates “are aware of what others can do for them, as well as what effect they might have on others. When working with others, high performers use their interpersonal understanding of others to influence and impact them, rather than using generic tactics. These individuals are also able to deal with conflict directly, while still maintaining a positive impression with others.”

These two products from Georgetown reiterate the importance of the “soft aspects” of practicing law– of culture and the attributes of emotional awareness and emotion management–not only in individual success but also in the success of a firm. Nice to have some analytic affirmation for the choir and some hard evidence for those who weren’t so sure.

Lawyer Personalities at Above the Law

By Ronda Muir on March 17, 2013 Posted in Assessments, Business Development, Client Service, Coaching, Communication, Conflict, Culture, Emotional Intelligence, Law Departments, Law Education, Leadership, Management, Mentoring, Professional Development, Profitability, Recruitment, Retention, Risk Management, White Papers, Work Satisfaction

Above the Law columnist Susan Moon, an in-house lawyer at Wyndham Worldwide, gave our The Unique Psychological World of Lawyers a nice plug last week, just hours after much of the data in it was discussed at a presentation at Yale Law Schoo l. An older article (since updated) and a "bit on the dry side," as she noted, she also found it "shamefully entertaining, such as finding out about the best ways to totally annoy your co-workers and how to play crazy mind games…core skills that you need to develop to perform effectively on the job…"

But aside from that use of the material, she also found "some of the observations and conclusions made in the article about lawyers’ personalities are extremely compelling…"

Something for everyone!

Muir to Present at Yale Law School

By Ronda Muir on March 5, 2013 Posted in Announcements, Assessments, Client Service, Conflict, Culture, Decision-Making, Emotional Intelligence, Law Education, Leadership, Management, Productivity, Profitability, Retention, Work Satisfaction

Ronda Muir, Esq., will present a seminar at Yale Law School on March 13, 2013 on "The Unique Psychological World of Lawyers–Strategies for a Successful and Satisfying Career." She will review data from research with respect to personality assessments, positive psychology, conflict management, the Meyers-Briggs Type Indicator and emotional intelligence showing the particular characteristics of lawyers that both reward and challenge them professionally and personally.

Attrition is Back!

By Ronda Muir on March 1, 2013 Posted in Compensation, Culture, Leadership, Management, Productivity, Profitability, Recruitment, Retention, Risk Management, Work Satisfaction

A question was posed recently in the press: – "Why are lawyers such terrible managers?"

The article appeared in CNN’s online Money/Fortune magazine. It cites statistics from the National Association for Legal Professionals Foundation that in 2010 law firms with 100 and fewer lawyers and 251-500 attorneys lost nearly one fifth of their associates. This is after the mass firings that occurred in 2008 and 2009, when reduced demand required that firms also reduce their overhead.

So this is a 20% attrition rate among lawyers who by all lights should feel lucky to have a job. What’s also interesting about the 20% annual rate is that that is the same rate at which, prior to the recession, associates were leaving their law firms. We consultants then were claiming that at such an alarming rate of departure, law firms would no longer be able to sustain their pyramid business model–they would no longer be able to work the drones till they dropped and then keep the keepers, as too many would have left. The more things change, the more they stay the same?

Why such fleeing from the law when jobs are scarce, salaries and prestige are high, and even big bonuses are coming back? As the article points out, the law firm turnover rate is almost 10 times the 2-3% turnover rate at Fortune’s 100 Best Companies To Work For. Of course, associates leave for many reasons, not the least of which is poor performance. But this article also points the finger at poor management.

“Aside from salaries and bonuses, law firms spend thousands of dollars recruiting and training each associate, often paying for bar exam preparation courses, moving expenses, and continuing legal education. So when a lawyer walks out the door, that investment walks out with him… Considering the money law firms invest in every newly hired attorney, it would make sense for partners to pay closer attention to lawyer satisfaction [but] most law firms have not seriously considered the costs they incur as a result of poor management – the loss of an unhappy associate being just one example."

In fact, according to law firm consultant Gerry Riskin, "most firms are oblivious" to attrition costs.

Staunching attrition costs poses another challenge to law firm managers: improving their workplace environment so as to promote the practice of a satisfying career. A mid-level associate at Schulte Roth & Zabel puts a point on it, according to the CNN article: "The general sentiment when people leave is, ‘thank God I don’t have to deal with this abuse anymore.’ Because at the end of the day, it’s constant abuse or fear of abuse."

We don’t have the NALP breakdown by gender on those leaving the law, but it is women who historically leave at the highest rates. Jordan Furlough in his latest post on why women leave law firms suggests that rather than come to the conclusion that the statistics mean that women can’t hack it, we might consider that they have been our canaries in the coal mine, quickly assessing early on an environment that is not productive or healthy and taking their talents elsewhere.

"Here’s my theory: women aren’t leaving law firms at an abnormal rate. They’re leaving law firms at a perfectly rational and normal rate. It’s men who are staying in law firms at an abnormal rate. Women aren’t the faulty outliers; men are… Women who enter law firms quickly and accurately diagnose that these are amateurish organizations that employ archaic workflow systems, inept pricing mechanisms, skewed compensation structures, and largely ineffective management, not to mention a whole lotta personal dysfunction. The typical contemporary law firm is nobody’s idea of a good business model, a satisfying workplace, or a solid bet for long-term future success. It shouldn’t surprise us that women abandon this model in droves. The question we ought to be asking ourselves is, why are men sticking with it in greater numbers than should rationally be expected?"

It remains to be seen how much longer the men will hold out. In the meantime, the prize will go to the firms that figure out what a competitive advantage it is to have satisfied associates who stick around.

Who Wants to Go to Law School?

By Ronda Muir on February 18, 2013 Posted in Client Service, Compensation, Culture, Law Education, Management, Profitability, Recruitment, Retention, Risk Management

Given our last entry, it is not surprising that law school applications have been going down dramatically over the last few years. With the high cost of law school, the paucity of jobs (only half the number of jobs as there are law school graduates) and the dimming career and earnings prospects for lawyers who do get law jobs, young people are voting with their feet. This is not a new subject for us, but these astonishing application numbers pose hard questions as to the viability of our law schools.

The reduction in applications started, actually, in 2004, when over 100,000 applied, going down steadily until a hiccup up in 2010 to 88,000 applicants, but then turning reliably downward again since then, with only 54,000 applications projected for the fall of 2013, or almost half of the decade’s high. There was a 13% drop from 2011 to 2012 and more than a 30% drop in 2012 from the 2004 peak, according to the Law School Admission Council, with the number of applicants for 2013 now at an all-time low–20% less than last year’s and 38% below 2010. And according to one commentator: "Even more interesting… is that the drop in applications has been disproportionately high among students earning the best scores on the LSAT." In the meantime, first-year enrollment has held steady throughout those years at roughly 49,000.

The attention of the mainstream press–The New York Times, The Atlantic, Forbes and The Daily Beast–has at least accentuated the problem, if not legitimized it, and will no doubt encourage those thinking, ambitious young people who would normally consider law school to reconsider.

Why so down on law school? Well, there are all those statistics about falling profits and high attrition rates in the law business. And the cost of law school is high. Some contend that law school tuition levels are unsustainable and others that law schools don’t teach the business skills clients want anyway. To put a point on it, a number of law schools have been sued for fraudulent deception by students and former students who are facing a marketplace unlike the one rosily described in the brochures. So why perpetuate such a flawed institution?

As a number of commentators have noted, at the end of 2003 there were 187 accredited law schools in the US, while today there are 201. Astoundingly enough, after accrediting 8 new law schools per decade during the 80s and 90s, the ABA has accredited 19 new law schools over the last decade, and, even more astoundingly, currently has more in the works! And this in spite of some in the business, including us, anticipating faculty layoffs and, for the first time in 40 years, even the closing of a number of law schools over the next few years.

Some discussion has focused on which law schools have "succeeded" in producing the BigLaw partners that all young lawyers aspire to, evidently, or at least which ones produce the biggest earners, or not, depending on who is talking and what statistics they are looking at. The problem is that the data is malleable and subject to varying interpretations (who said that if you torture statistics enough, they will tell you anything you want to hear?), and the marketplace has changed dramatically since those 50somethings who are currently partners were starting out. So historical information only has limited value.

In counterpoint to the fall of law school applications has been the rise of advocacy for the two-year law school, the revival of apprenticeships instead of law school and even the elimination of law school in favor of an undergraduate law degree (see the aptly titled "First Thing We Do, Let’s Kill All the Law Schools"), which is the primary route to law practice in Great Britain. Others, like Bill Henderson, have suggestions on how to fine-tune what we have, which some say must include adding the business classes that our young lawyers need to manage their legal businesses or apprenticeships to existing law school curriculum. Today, in The New York Times, John Farmer, former attorney general of New jersey and currently the dean of Rutgers School of Law, proposes that a two-year post-law school apprenticeship, like a medical residency requirement, would not only improve the quality of lawyers but also provide much needed legal counsel.to low-income groups.

But what, if anything, has been done with all this fine advice? Well, Yale Law School has announced a Ph.D. in law that it claims is the first in the nation, and designed for wannabe law professors and legal scholars.

In the meantime The American Lawyer recently reported that fewer summer associates and first year associate positions are available this year. According to data released by NALP, the number of offers for summer associate positions that law firms made to 2Ls last fall fell slightly. The percentage of interviews that resulted in summer associate offers also declined from 46% in 2011 to 44% last fall. The hiring situation for new graduates appears to be even worse. Only 19% of law firm offices considered 3Ls last fall. Even the 90% of 2012 summer associates who received job offers from the firms for which they’d clerked represented a 1% decline over the previous year.

There is clearly a groundswelll. No one seems happy with the status quo. Can we turn what seems mostly like musings or worse, blamings after the horse is out of the barn into a proactive approach to reforming our law schools into net contributors to what is needed over the next decade–well-prepared candidates for the fine jobs that law still offers in the decades ahead?

Adjusting to the New Normal

By Ronda Muir on February 9, 2013 Posted in Profitability

The takeaway from a review of the financial news on law firm economics for 2012 is, as the aptly titled "The Boom Years Are Not Coming Back" proclaims: Firms "can no longer rely on a rising tide that lifts all boats. In fact, the tide is out."

In particular, that client advisory produced by Citi Private Bank’s Law Firm Group and Hildebrandt Consulting found that:

Demand for legal services dropped an average of 0.4% between 2008 and 2012 compared to an average 3.7% increase between 2004 and 2008.
Average revenue growth of 9.8% in that earlier time frame dropped to just 0.8% growth in the more recent years.
Rates are rising at a slower pace now than before the downturn.
Average hours per lawyer fell to 1,641 in 2011, versus an average of 1,742 from 2001 to 2007, with partners being responsible for most of that drop.

According to the Wells Fargo report on law firms, based on the first 9 months or 2012, equity partners are projected to have worked an average of 1,602 hours in 2012, down1.7% from 2011; nonequity partners an average of 1,530 hours, a 1.6 % decline (while at the same time their numbers have increased 4%); and associates are projected to average 1,768 hours, a 0.5% drop from 2011.

Citi Private Bank’s full-year 2012 forecast shows law firm profits increased by 4.3% in 2012, much higher than third quarter 2012 results anticipated, but due to factors in the fourth quarter that may not be sustainable–strong collections that raised revenues, a small spike in demand, and more moderate growth in expenses.

The collection cycle shortened by 2.1% largely because of the focus on 2013 tax changes. The full year demand growth rate averaged out to just 0.2%. Expense growth slowed to 3.1%, less than revenue growth, due to a slowdown in head count growth, the lack of spring bonuses in 2012 and firms possibly having caught up on delayed infrastructure projects. Equity partner head count was up just 0.1% and productivity declined 0.6%.

Still, the Am Law 1-50 results for 2012 are flat compared to the prior year, and smaller firms saw a decline. What Citibank calls "survivorship bias," in which failed firm Dewey & LeBoeuf’s revenue was taken out of 2011 results and essentially transferred via laterals to other firms in 2012, resulted, in their opinion, in higher 2012 revenue than would otherwise have been registered. According to them, if Dewey’s figures were included in the 2011 data, revenue growth for 2012 of 3.6% would be reduced to about 2.6%, demand would have been a negative 0.5% and equity partner head count would have been a negative1%.

Smock Law Firm Consultants’ annual survey in early January 2013 of 24 law firms came to much the same conclusions as Wells Fargo and Citibank. "Overall firm results were considered to be quite positive for 2012, not as strong as 2010, but certainly stronger than 2011….most firms we interviewed are looking at a flat or close to flat 2012 budget."

Similarly, the recently released Georgetown–Peer Monitor report describes 2012 as "another year of only modest growth," showing an average increase in profits per partner of 3.58%, while Am Law 100 firms saw profits rise 2.45%, compared to the 4% gain for non-Am Law 100 firms. [Note that all these reports differ in their assessment of the financial condition of the largest firms, a fact interesting in itself.] While this report agrees that law firms will not regain pre-recession growth, it contends that even the profitability in the decade prior to 2008 was not a harbinger of good times to come but mostly the result of high annual billing rate increases of 6-8% "that bore little relationship to what was going on in the broader economy…The cumulative impact of these increases over time created a trajectory that was simply unsustainable."

Citibank’s maintains a so-called watch list, first mentioned publicly in October, based on an assessment of primarily four factors: heavy lateral churn, high bank debt, weak leadership, and cracks in firm culture.

While Citibank is not releasing any names, they note that lateral movement remains generally high while bank debt—which served as huge factors in the demise of Thelen, Heller Ehrman, Howrey, Dewey, and others—seems to have moderated. According to Wells Fargo, as of September 30, firms were carrying balances on their lines of credit that were, on average, a third higher than they were the year before. But the trend is for firms to reduce their reliance on debt and increase capital contributions. From 2006 to 2011, for example, average debt per equity partner among half of The Am Law 100 that Wells has been tracking fell from $64,338 to $55,491, having peaked at $85,716 in 2008. During the same period, debt as a percentage of net firm income fell from 5.8 percent to 4.2 percent. As a counterpoint, the Citibank advisory says partners contributed capital averaging $317,000 in 2011 versus $190,000 in 2004.

That leaves leadership effectiveness and culture, not measured by any of these reports, for firms to take a hard look at.

Continued overcapacity remains a bottom-line conclusion from all this data. The legal sector lost 2,400 jobs in January, according to seasonally adjusted preliminary employment data released by the U.S. Bureau of Labor Statistics. According to an analysis by The AmLaw Daily, losses effectively wiped out all the jobs the industry gained in December—a figure that was revised upward to 1,900 from an original estimate of 1,000, although the legal sector now employs 6,500 more people than it did at the same point last year. "Although the 1.125 million people currently working in legal services jobs make the sector’s workforce the biggest it’s been since May 2009, the industry has still shed about 50,000 positions since its precession peak." Further, the legal sector grew at a slower pace in 2012 than the broader economy: law saw a net gain of 7,800 jobs—a 0.7% increase over 2011, which was only half the growth rate of the overall workforce (1.4%).

The recent spate of layoffs and office closings at several large UK firms–including Allen & Overy, DLA Piper and Eversheds–has raised the question as to whether there will be another round of job losses in the US. Certainly the hard numbers make that look like a reasonable possibility.

So for 2013? While 2013 results will depend in large part on how firms handle expenses and headcount, the clear concensus is that the prosperity realized between 2001 and 2007 can’t be considered the norm. "We think it is time to let go of any lingering notion that the industry will revert to the boom years before the Great Recession any time soon," according to Citibank’s DiPietro. "[P]rofits per equity partner growth in 2013 will likely be again in the low single-digits—the new definition of a good year for the legal industry."

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