The US law firm industry is on pace to post its strongest growth year since the pre-recession late-2000s, but this booming performance isn’t being distributed equally. Outperforming are the largest law firms as well as niche firms with strong brand recognition, according to the newly-released 2019 Citi Hildebrandt Client Advisory.
Issued by the Law Firm Group at Citi Private Bank and Hildebrandt Consulting, the annual Client Advisory uses data collected from a sampling of primarily US-headquartered law firms gathered by Citi Private Bank. The 2019 Advisory found that through the first nine months of 2018, surveyed law firms posted an average revenue growth rate of 6.3%. As in the past few years, some of this was fueled by rate increases, a trend that strengthened in 2018. Billing rates grew by 4.3% — the highest result the survey has posted at the nine-month point since 2014.
This growth pace also topped the 2010-‘17 average compound annual growth rate (CAGR) of 3.9%. Further, demand growth of 2.5% in the 2018 nine-month period was the highest that the survey has recorded since 2007, topping the average CAGR of 1.1% of the 2010-‘17 period.
The Advisory’s executive summary noted that the authors “expect that 2019 will be another strong year in top-line growth for the law firm industry, in the range of 6% to 7%”. The survey projects profit per equity partner growth to likely be in the mid-single-digit range. “With dispersion expected to remain, further consolidation is likely,” the summary stated. “And we expect to see strong outperformance by the firms with the strongest brands, particularly those focused on profitable growth and institutionalizing valuable clients.”
“We’re going to see more consolidation. The cost of doing business — the associates cost, the cybersecurity cost, the technology cost — all of it will put a lot of pressure on firms competing in a similar market.”
— Brad Hildebrandt
Not surprisingly, the current market boom doesn’t apply to all types of firms. Much of the revenue growth among the Am Law 200 firms so far this year is concentrated among the top 50 firms, while many of those firms ranked between 100 and 200 had underperformed. So while average demand across the Am Law 50 rose by 3.3% during the first nine months of 2018, the Am Law “Second Hundred” experienced a decline of 0.2%.
The Second Hundred also underperformed compared to niche firms — those outside the Am Law 200. The survey noted that these firms had the second-strongest set of results after the Top 50 firms, with demand growing by an average of 2.5% during the nine-month period in 2018. Indeed, more than 40% of niche practices reported revenue growth of 5% or more.
Performance often depends on which law firms have most successfully branded and built their reputations. In the case of niche firms, many strong performers “are those firms that have become very well known for what they do in litigation,” says Brad Hildebrandt, Chairman of Hildebrandt Consulting. “That’s what’s helped them.” And while demand fell for the majority of Second Hundred firms, a select group significantly outperformed their direct peers, the Am Law 100, and niche practice rivals: 15% of Second Hundred firms had a growth rate of 5% or higher.
The survey also reported notable increases in staffing (total lawyer headcount grew 1.6% in the nine-month period in 2018) and in average lawyer productivity (0.9%). Law firm costs also shot up by nearly 6% in the nine-month period — a natural correlation to the increased headcount in salaried lawyers, along with mid-year associate salary increases.
Higher costs could spell trouble for underperforming firms ranked between 100 and 200, and that could drive more industry mergers. “We’re going to see more consolidation,” Hildebrandt notes. “The cost of doing business — the associates cost, the cybersecurity cost, the technology cost — all of it will put a lot of pressure on firms competing in a similar market.”
Another serious issue for these firms is one of productivity, he adds. “When some firms wonder why they’re not doing as well, you can often trace that back to the low productivity of partners,” Hildebrandt says. By contrast, when you look at top-performing firms, “they usually have strong accountability for partner performance.”
Another factor for which even strong-performing firms may be unprepared is the impending wave of equity partner retirements and their impact on client retention. Firms have anticipated that partner retirements would overtake de-equitization in 2018, in part because half of the surveyed firms have mandatory retirement programs. As the study points out, the growing pace of partner retirements means that firms will have to transition an ever-increasing number of client relationships. “This transition period is the point in time when clients are particularly susceptible to overtures from other law firms,” says Hildebrandt.
Indeed, succession is one of the biggest challenges that law firms face in the near future, he explains. “Succession is still often thought of as, ‘Who is our next managing partner?’ But what’s more critical is managing the succession of clients from the older generation [of partners].”