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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