August 18, 2012
Report: Law Firms to Experience Tepid Growth in 2012
American Lawyer op-ed: Citi Midyear Report Sees Signs of Trouble Ahead for Firms, by Dan DiPietro & Gretta Rusanow (both of Citi Private Bank's Law Firm Group):
Based on our read of the results for the first half of 2012, we're now concerned that this year the legal industry may be unable to match 2011's low single-digit profit growth. There are three reasons for our concern: demand growth slowed during the second quarter from an already tepid first-quarter level; inventory as of June 30 had grown little from the prior year, not a good omen for future collections; and signs that realization will decline again in 2012, squeezing profit margins even further. ...
These results are based on a sample of 176 firms (79 Am Law 100 firms, 47 Second Hundred firms, and 50 additional firms). Citi Private Bank provides financial services to more than 600 U.S. and U.K. law firms and more than 35,000 individual lawyers. Each quarter, the Law Firm Group confidentially surveys firms in The Am Law 100 and Second Hundred, along with smaller firms. ...
Looking ahead, a weak increase in inventory (1.8% growth in mid-2012, compared to 6.3% growth seen in mid-2011) does not augur well for third-quarter collections. With weak demand growth and the continuation of expense growth, it is likely that expenses will continue to grow at a faster pace than revenue, squeezing margins and making it tricky to achieve even low single-digit profit growth.
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If you keep reading the report explains that profits are also being squeezed because firms are hiring more associates, paying them more, and not working them as hard. And the top firms are paying less (no bonuses) so the increase in pay is coming from the lower ranked firms.
Sounds pretty good if you're an associate.
"expenses continue to grow at a materially greater rate than we’ve seen in recent years, exceeding revenue growth. While head count growth accounts for some of the increase (the growth in compensation expenses was 2 percent), the increase in total expenses was driven more by growth in overhead expenses (5.5 percent). We continue to hear firms talk about pressure to upgrade technology, as well as an uptick in health insurance costs. Looking at firms by Am Law 200 designation, expense growth slowed during the second quarter for all segments of the market. Most notable was the decline in compensation expenses experienced by Am Law 1–50 firms, which did not pay spring bonuses this year.
Head count increased a modest 1.1 percent for the industry during the first half of 2012, having slowed during the second quarter for all Am Law 200 segments, and actually declining for non–Am Law 200 firms. Equity partner head count continued to increase only slightly, driven by modest increases among the two Am Law 100 segments. These changes in head count also resulted in a more modest increase in leverage than we saw during the first quarter.
With head count growth outpacing demand growth, we saw the relatively flat growth in productivity of the first quarter become a decline of 0.8 percent across the industry by the middle of the year. The biggest driver of this decline was the Am Law 1–50 firms, which saw the 0.5 percent decline in productivity they experienced during the first quarter accelerate to a 1.5 percent decline for the first half of 2012, when compared to the same period in 2011.
With billable hours well below historical levels for all segments, we see the continuing trend of firms feeling pressure to discount their fees. We have already seen declining realization during the first half of 2012, as reported to us in the Law Firm Leaders Survey we conducted in July of the managing partners of 57 Am Law 100 and Second Hundred firms. In response to the question, “How has realization changed in the first six months of 2012 [compared to] the same period in 2011?,” 55 percent indicated a decline—more than in either of the prior two years’ survey results."
Posted by: Anon | Aug 18, 2012 8:19:39 PM
Demand growth is a lack of product demand which is concerned with the satisfaction of the customers. Due to demand growth, producers must be able to produced more products to meet the need of the customers.
Posted by: driving lessons Evesham | Aug 18, 2012 9:56:11 PM
"If you keep reading the report explains that profits are also being squeezed because firms are hiring more associates, paying them more, and not working them as hard. And the top firms are paying less (no bonuses) so the increase in pay is coming from the lower ranked firms.
Sounds pretty good if you're an associate."
Except inflation-adjusted pay at Cravath and other top firms has only increased by 42% since 1985 while inflation-adjusted tuition at Harvard and other law schools has increased by almost 500%. Nice try, though.
Posted by: Nona a brain in Anon | Aug 19, 2012 10:20:19 AM
Hard to care too much about Am Law 100 (or even 200) associate outcomes when the broader NLJ Top 250 firms include only about 100,000 lawyers *total*.
Out of 1.4 *million* lawyers in the nation.
Fixating on the outsized pay of a mere 7% of the profession has helped lead to the profession's ruin for the vast majority of its practitioners.
One look at the bi-modal distribution of salaries will tell you that.
Being a habitual school-cheerleading troll, Anon, I'm sure you don't care - but others do.
Posted by: cas127 | Aug 21, 2012 6:24:13 PM