Here is the latest on the financial state of the US legal industry.

Citibank reported last month that during the first quarter of 2012, demand for legal services grew a paltry 1.5%, although at least reversing the decline in the 2011 fourth quarter. But expense growth of 5.9% outpaced the meager revenue growth (1.2%) even more than in 2011–a rise in operating expenses of 6.7% was almost double the rate of increase during the first quarter of 2011.

"However, there were notable differences across market segments. While revenue growth was strong for Am Law 51–100 firms and firms outside The Am Law 200, Am Law 1–50 and Second Hundred firms saw virtually no growth. Demand growth was also patchy. Am Law 51–100 and Second Hundred firms saw solid demand growth, while smaller firms saw demand continue to decline. Am Law 1–50 firms saw just a 0.6 percent increase. Rate increases continued to grow at a similar rate to 2011, and more than in the two years prior, but still lag behind historical averages."

Head count increased most for the Second Hundred, with an increase in the number of equity partners by 1.5%, primarily attributable to mergers, compared to the overall equity partner increase of 0.7%–with no increase in equity partners for the Am Law 1–50. An overall growth rate in head count of all attorneys across all segments (1.6%) "meant that there was no change in the industry’s productivity numbers, which have been historically low since the recession."  

According to Citibank,  "At a gap of 100 hours below historical productivity levels, firms continue to experience significant excess capacity."

The US Bureau of Labor Statistics reported on Friday that 600 legal jobs were added in May, a strong downturn from April, when there were an additional 3,500 positions, the strongest month for job growth since an increase of 4,800 jobs July 2011. Therefore, since the start of the year, there are 4,300 additional legal jobs, making a current total of nearly 1.12 million legal positions, about 5,000 more than in May 2011, but well below May 2008, for example, when there were roughly 44,000 more jobs than there are now.

According to Altman Weil’s MergerLine,the pace of mergers and acquisition in the legal industry for the first quarter of 2012 has kept up  with the five quarters preceding it, nearly tripling the low point of 5 mergers that was struck during the third quarter of 2010.  Most of these deals are large firms acquiring smaller ones. 

So what does this all mean?  The operative words are "excess capacity" –a situation that is not likely to improve in the next few years or even a decade. See our entry "Downsizing the Legal Industry." 

There is increasing competition from technologyoutsourcers, other alternative legal service providers and nimbler competitors. Clients going elsewhere or demanding better deals slow revenues and expenses eat into profits.  Firms are often paralyzed in their old tracks, like deer in the headlights–responding by just hiring fewer associates, making no partners, paying declining compensation. The malaise and resentment that builds sends ambitious young lawyers to other firms, poisons relationships among partners and provokes more client flight.  Then someone suggests that maybe hiring a few stars or merging would cheer everyone up.

And a few years later there is a reprise of Dewey & LeBoeuf.

Isn’t now the time to take a fresh look and new approach to firm management and client service?