Every year, Jon Escher, founding partner of the legal recruiting firm, Solutus Legal Search, based in Silicon Valley, makes a presentation to students about the Silicon Valley legal market.

He also prepares a guide to Northern California law firms by practice area, which includes descriptions of those areas as they are practiced specifically in this geographic area.

We just posted to the 2015 version of the Guide on this page of CDO webcasts.  Unfortunately, the webcasting equipment malfunctioned, so we do not have a 2015 version of his in-person remarks this year, but we left the 2013 version up there in case you’re interested.

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:

• 2014 saw a modest increase (0.5%) in the demand for legal services, which is better than the drop in demand experienced in 2013, but overall indicative of a trend, which has extended over the past 5 years, of fairly flat demand growth
• the growth has been in transactional practice activities (corporate, tax, and real estate); demand growth in litigation was actually slightly negative.  Litigation still accounts for about a third of all practice activities (though it was more like 40% twenty years ago). Corporate accounts for 23% (and tax and real estate come in at 3% and 6% respectively).
• number of lawyers in US firms grew by 1.4% in 2014 (about a percent more than demand, which in turn led productivity to fall a bit)
• despite all this, profits per partner (PPP) were up 3.1% (over 2013, a year during which PPP grew by only 1%)
• if you adjust for inflation, business spending on legal services is down almost 26% from where it was in 2004

The Report also addressed the reasons why the legal market has not improved to the same extent that many other sectors of the economy have:

• corporations increasingly keeping work in-house or farming it out to non-law firm service providers
• general counsel finding litigation a less attractive option as it’s become more expensive (e-discovery)
• continuing proliferation of new, non-traditional service providers (facilitated by the steady world-wide collapse of, or the finding of workarounds to, regulatory barriers that shielded law firms from such competition in the past)

Finally, the Report includes a discussion of another observed phenomenon: the fact that the rising economic tide is not lifting all boats at the same rate.  20 firms in the AmLaw 100 and about the same number in the second hundred are far outpacing their competitors in their respective “classes.”  Dubbed the Super Rich by the American Lawyer (see April 29, 2014 article (online) entitled AmLaw 100 Analysis: The Super Rich Get Richer available via Lexis), those in the first hundred grew their revenue by 20% and their PPP by almost 32% since 2008.  And they accomplished this with only modest growth (5% headcount increase and only 4.3% increase in equity partner ranks).

The elite high performing firms in the second hundred increased their gross revenues by 4.6% (compared to the 1.1% growth rate for the other 80 firms in the second hundred.  Their PPP increased 3% (compared to the other 80, which saw a growth rate of -0.8%).

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.