A flurry of reports this month on law firm financial results for the first half of 2013 have come in with fairly uniformly disappointing news.
Flat Growth
Citi Private Bank’s Law Firm Group reports that “while the industry is no longer in freefall… tepid demand and intense pricing pressure continue to plague most firms.” Rate growth drove the small amount of revenue growth reported, since demand actually declined. Expense growth lessened but still outpaced revenue growth, with head count growth worsening excess capacity, particularly in the AmLaw 50. Reviewing the situation, Citi revised its earlier projection of low single-digit profit growth for the year to flat growth.
Wells Fargo Private Bank’s Legal Specialty Group also reports that expenses are up and revenues down–the dismaying dilemma of 2013. Of 120 firms, only about a dozen reported a revenue increase of 10% or more, with the bank noting continuing “stratification, where the stronger firms continue to get stronger.” Slightly higher blended average rates were found to at least partially reflect a larger proportion of senior attorneys on matters, given reductions in junior staffing. And some rates that were raised were only discounted later, as collection continues to be a problem. The good news, although perhaps not for individual partners, may be that average capital per equity partner is up 2%, to $300,000, and firms are decreasing their debt.
The Biggest Challenge
Wells Fargo considers dealing with under-productive partners “the biggest challenge the industry faces.” According to their data, in 2012, a third of law firm partners billed 1,400 hours or fewer compared to an anticipated average for all lawyers of 1,600 hours each for this year, which is itself down from last year’s 1,640-hour average.
These results follow the trends identified in Citi Hildebrandt 2013 Client Advisory issued at the beginning of the year, including lower demand, lower rate of increases in rates, flat revenue and decreasing profits per equity partner, with growth primarily occurring through lateral hiring. From 2007 to 2011, for example, associate promotions declined by 21% at the same time as growth through laterals increased 10%.
Luring the Laterals
The result is a marketplace for lawyers who can be motivated to move to richer pastures, which law firms try to provide with increasingly outlandish perks that don’t involve paying real money. In the UK, among the benefits offered to laterals who will agree to move are a cash “spouse allowance” for non-working partners (in compensation for their having to attend required events), free or reduced-cost medical insurance, life assurance and income protection packages, a home phone line and internet service, a parking space and car loan. Even concierge service and a free set of luggage annually–to compensate for all the wear and tear during the year–can be had at the right firm. All done to “differentiate themselves by being more generous in order to both retain partners and attract new ones.”
While this is hardly on the order of Dewey’s outlandishly high compensation guarantees, which ultimately sank the behemoth, evidently “offering [these kind of benefits] can see heart win over mind.” And in the end, that may indeed be what decides the matter.
Reconciling the Two Trends
What we are left with, after these various perks are figured in, is essentially a smaller pool of profit for those partners who are less productive or less influential or both, without the necessity of the compensation or executive committee having to confront the less powerful or valuable with a crass discussion about an adjustment in his/’her points or compensation. Offering more than one way to skin this particular cat.