Citi’s Midyear Report on the state of the legal industry for the first 6 months of this year is a cautionary read, harrowingly notable for its brevity.
"[W]e’re now concerned that this year the legal industry may be unable to match 2011′s low single-digit profit growth. There are three reasons for our concern: demand growth slowed during the second quarter from an already tepid first-quarter level; inventory as of June 30 had grown little from the prior year, not a good omen for future collections; and signs that realization will decline again in 2012, squeezing profit margins even further."
Note the ominous warning: not even single digit profitability is assured this year.
Demand grew just 0.3% during the first half of 2012 compared to 1.5% for the first quarter. Expenses continued to grow faster than in recent years, with growth in compensation 2% (head count increasing a modest 1.1% and equity partner head count increasing only slightly) while overhead expenses grew 5.5%.
The relatively flat growth in first quarter productivity became a decline of 0.8% across the industry by midyear. The biggest driver in decline was from the Am Law 1–50 firms, which saw the 0.5% first quarter decline accelerate to a 1.5% decline for the first half. The decline in growth and productivity coupled with a significant decline in realization compared to the past two years and a weak increase in inventory (1.8% growth in mid-2012, compared to 6.3% growth in mid-2011) spells, in technical language, trouble with a capital T.
The conclusion has to be that the rope that was thrown out by most firms at the start of the recession is starting to play out to its inevitable end. Expenses have been cut dramatically–supplier contracts were renegotiated, new hires were reduced, staff was cut, bonuses were lowered or eliminated, new partners were made only sparingly. And when that was not enough to recover pre-recession profitability, expenses were cut some more. Collection turnaround was ramped up and business development strategy meetings proliferated. A few laterals with promising books of business were bought in, most of whom were not able to fully deliver. This is what you and your competition have been doing to try to gain on that thin margin of profitability.
But in spite of these lockstep maneuvers, in many cases there has not been much traction and in the worst cases other Deweys are in the wings. There is a new reality in which your firm has to at least outrun the other campers, if not the bear, as the saying goes and Paul Lippe reminds us. And achieving truly "revolutionary change" that most businesses would not consider so revolutionary is at the crux of doing that.