It’s been awhile since we’ve posted.  Among the reasons we’ve been silent is that the financial picture for law firms generally had not seemed to change all that drastically over the last several months.  It’s been largely flat for quite awhile.

However, we recently came across some modestly positive news and thought we’d share it.  It’s from the latest Citigroup quarterly report and comes to us via the American Lawyer’s AmLaw Daily.

According to Citigroup, the first nine months of 2014 have been good financially for the law firm market.  However, the news has not been equally good for each segment within that market.  The largest and most international firms (particularly those with strong transactional practices) have fared the best.

Demand for legal services was up 1.6%.  At the same time, firms kept a tight control on their headcount, which increased by only .6%.  That means, of course, productivity is up.  Revenue was up 4.8% at the largest firms (the AmLaw 1-50), but only 3% for AmLaw 51-100 firms and only 1.5% for smaller firms.

Looking at profitability and the segmentation within the industry becomes more apparent.  74% of AmLaw 1-50 firms saw profits per equity partner (PPEP) increase whereas only 59% of AmLaw 51-200 equity partners saw an increase in their profits.  51% of smaller firms saw a PPEP decline.

Citigroup projects that when the data for the entire year is in, the story for 2014 will be “mid-single digit growth for the industry as a whole . . . [with] AmLaw 1-50 firms . . . significantly outperform[ing] the other industry segments.”

Details about how Citigroup gathers its data are contained in the American Lawyer article.

A recent article in the Recorder, SF’s legal newspaper, reports on CA firm financials for 2012.  While revenue gains were modest, many firms noticeably increased their profits.  The article attributes the increase partly to expense cutting, but mainly to reduced headcount, particularly among firm partnership ranks.  The increases experienced by firms whose biggest offices are in Silicon Valley were the result of increased demand for their tech expertise, rather than trimming ranks.  In fact, some Silicon Valley firms actually increased headcount.   

There are several interesting insights into big law firm business operations that will be useful to those of you heading to large firms (or considering interviewing with them in the fall).

Thomson Reuters Peer Monitor — in conjunction with Georgetown University Law Center’s Center on the Study of the Legal Profession — recently issued its annual report on the legal market, which you can find here.    Some highlights of 2012:

• growth in demand for legal services up by a mere .5%
• the number of lawyers increased by 2% (which put growth in productivity, i.e., number of hours a firm bills divided by number of lawyers, in negative territory) 
• profits per partner grew modestly at 3.58% (partners at non-AmLaw 100 firms fared better than those from AmLaw 100)
• it was a banner year for global expansion of U.S. and international law firms (96 cross border law firm mergers took place)

The report analyzes some of the longer term trends behind these numbers.  It’s a must-read.

As for 2013, the authors of the report predict “that most firms will continue to struggle to maintain profitability as the combined effects of slow demand growth, declining realization rates, and persistent overcapacity will continue to eat into profit margins. We do expect to see some growth in revenues and continued rigorous efforts to manage expenses, but overall we anticipate that there will be only modest growth in profits per equity partner in the current year – probably in the low single digit range.”

Those of you who follow our blog, know that we regularly share with you the results of law business consultant Hildebrandt’s quarterly reports on the state of the large law firm market.  Their report for the third quarter of 2012 (ending September 30th) is now out.

Like the last report (for Q 2), it’s not positive.

Key findings:

• overall demand for legal services dropped by 0.8%
• demand was down in every practice area with the exception of labor and employment, which was up by 2.5%
• IP litigation, which was a practice area that had performed relatively strongly in the recent past, was down by 3.6% in Q3.
• mid-sized firms performed relatively better than the largest firms
• demand in NY was up 4%, but down in LA, Silicon Valley, DC, and Chicago  
• attorney headcount continued to grow, but the growth rate slowed
• the attorney replenishment ratio remained at 1.3 (about where it’s been for the rest of 2012)
• productivity (the measure of the ratio between capacity and demand) fell 2.5% (the third consecutive quarterly decline)   

 Bottom line is that Hildebrandt finds no reason to alter the prediction contained in its Q2 report that the large firm legal market will continue its “sluggish, largely flat trajectory” [Hildebrandt’s language] for the foreseeable future.

Hildebrandt and Citibank Private Bank both recently issued reports on the large firm legal market as of the end of the second quarter of this year (June 2012).  We regularly blog about their quarterly reports.

The latest reports are not positive. 

Among the key findings:

• demand for legal services fell slightly (0.2%)
• law firms’ expenses are continuing to rise faster than their revenues; however the pace of the increase has slightly slowed in Q 2
• the growth in attorney headcount slowed slightly (the associate replenishment ratio went from 1.4 in Q 1 to 1.3 in Q 2
• productivity (a measure of the ratio between capacity and demand) fell 2.5% (productivity also fell in the previous 2 quarters)
• clients continue to exert pressure on pricing

The reports caution that hiring may slow as the year wears on, as firms realize that market demand does not currently justify adding additional capacity.  They predict that the large firm legal market will continue its “sluggish, largely flat trajectory” [Hildebrandt’s language] for the foreseeable future.