April 25, 2018
More Office Closings Than Openings
For the first time in four years, there were more law firm office closings than openings. A recent report by Leopard Solutions indicated a significant drop in office openings from 2016 to 2017, which continued a trend from 2015 to 2016. Meanwhile, office closings saw a slight increase from 2016 to 2017, however closings remained relatively flat over the past four years. The report, titled Annual Assessment of the Competitive Landscape for Law Firms, noted the drop in openings was likely due to a flattening of demand for most of 2017. This also tracks with the slight decline in lateral hires in 2017.
"The trend of declining office openings (and steady closings) corresponds to a period of stagnant demand for legal services - a trend that has been observed by a number of independent analysts. Altman Weil's latest Law Firms in Transition survey found that an erosion in demand for legal services is 'endemic' across the sector, while Citi/Hildebrandt's 2018 Client Advisory found demand growth has slowed significantly over the past two years," noted the Leopard Solutions report.
Strong 4th Quarter 2017
The above article notwithstanding, the fourth quarter 2017 in the legal industry showed a strong finish to the year. Citi Private Bank Law Firm Group's FY 2017 survey of law firms found that while most of 2017 showed flat demand and flat revenues, the fourth quarter pushed the year into positive territory for most law firms. "Last year finished out strong for the law firm industry, outpacing 2016 in revenue and profit growth. Stronger revenue growth came from comparatively higher billing rate increases and improved demand, especially during the fourth quarter," wrote Citi's John Wilmouth and Gretta Rusanow in The American Lawyer.
Citi surveyed 189 AmLaw 100, second hundred and boutique law firms in the U.S., and found law firm billing rates up 3.7 percent in 2017. Demand picked up 0.7 percent for the year despite being down 0.2 percent for the first nine months of 2017. Which compared favorably to just 0.1 percent growth in 2016. Expenses increased as well, with a 4.5 percent increase compared to just 3.4 percent growth in 2016. The article notes that most of the expense growth came from lawyer salaries, which increased 6.5 percent compared to 5.4 percent in 2016.
Accordingly, "[p]rofit margins remained flat, as revenue and expenses grew at the same rate, but given that the growth rate for each was higher than in 2016, net income also grew more-4.5 percent compared to 4.3 percent. With the modest decrease in equity partner headcount as compared to 2016's increase, 2017's PPEP [profit per equity partner] growth was also comparatively stronger, at 4.8 percent versus 4.1 percent," reported the Citi bankers.
Regional versus National or International
The profit advantage of being a national or international law firm may be dissipating, according to an article in Law.com by Marcie Borgal Shunk, president of The Tilt Institute. The article, titled "Does Geographic Growth Pay Off?," reports that while revenues in absolute terms may be higher for national and international firms in the AmLaw 200, both profits per lawyer (PPL) and revenues per lawyer (RPL) are not. Ms. Shunk finds that national firms, in 2016, generated 27% more revenues than the average 200 firms, however their RPL and PPEP are about the same as the average of firms and their PPLs are lower.
Similarly, international law firms have revenues that are 2.6 times higher than the average 200 firms and their PPEP is 26% higher as well, nevertheless both their RPL and PPL are lower than the average of firms. Importantly, Ms. Shunk finds that the profit margins of national and international firms are lower than the average. While growing from a regional to a national or international firm may bring higher revenues, it may not bring higher profit margins or greater efficiencies.
"In short, the firms who grew from regional to national or international are bigger but not necessarily better. Being national or international is an attractive position with somewhat mixed results. The appeal is not ubiquitous. On a broader scale, the implications for the industry are equally murky. As firms continue to jump on the national and international bandwagon, the system itself will continue to show signs of strain - overcapacity, slowed growth rates and declining profit margins," writes Ms. Shunk.
The Key To Keeping Corporate Clients
A recent article in Thomson Reuters' Legal Executive Institute notes that the number one reason clients switch law firms is a "lack of value." The article, titled "Your Firm's on the Verge of Being Fired, What Are You Going to Do About It?," by Bill Josten, says that 58 percent of corporate clients shift some of their matters from one law firm to another every couple of years. And, 18 percent shift work more than once a year. Corporate clients appear to be taking advantage of flat demand in the legal market and shopping for better pricing from their law firms.
The article reports that when it comes to value most clients are looking for efficiency, cost effectiveness and predictability. Law firms and lawyers that can effectively communicate the value of their legal services and adapt pricing to best suite that needs of their clients have a better chance of retaining existing clients and attracting new ones. "Clients don't want to just pay for something - they want to feel they are buying something of value. The recently released State of the Corporate Legal Department report found that two-thirds of corporations consider it a priority to allocate more work to those outside firms who are delivering value effectively," writes Mr. Josten.
For the first time in four years, there were more law firm office closings than openings. A recent report by Leopard Solutions indicated a significant drop in office openings from 2016 to 2017, which continued a trend from 2015 to 2016. Meanwhile, office closings saw a slight increase from 2016 to 2017, however closings remained relatively flat over the past four years. The report, titled Annual Assessment of the Competitive Landscape for Law Firms, noted the drop in openings was likely due to a flattening of demand for most of 2017. This also tracks with the slight decline in lateral hires in 2017.
"The trend of declining office openings (and steady closings) corresponds to a period of stagnant demand for legal services - a trend that has been observed by a number of independent analysts. Altman Weil's latest Law Firms in Transition survey found that an erosion in demand for legal services is 'endemic' across the sector, while Citi/Hildebrandt's 2018 Client Advisory found demand growth has slowed significantly over the past two years," noted the Leopard Solutions report.
Strong 4th Quarter 2017
The above article notwithstanding, the fourth quarter 2017 in the legal industry showed a strong finish to the year. Citi Private Bank Law Firm Group's FY 2017 survey of law firms found that while most of 2017 showed flat demand and flat revenues, the fourth quarter pushed the year into positive territory for most law firms. "Last year finished out strong for the law firm industry, outpacing 2016 in revenue and profit growth. Stronger revenue growth came from comparatively higher billing rate increases and improved demand, especially during the fourth quarter," wrote Citi's John Wilmouth and Gretta Rusanow in The American Lawyer.
Citi surveyed 189 AmLaw 100, second hundred and boutique law firms in the U.S., and found law firm billing rates up 3.7 percent in 2017. Demand picked up 0.7 percent for the year despite being down 0.2 percent for the first nine months of 2017. Which compared favorably to just 0.1 percent growth in 2016. Expenses increased as well, with a 4.5 percent increase compared to just 3.4 percent growth in 2016. The article notes that most of the expense growth came from lawyer salaries, which increased 6.5 percent compared to 5.4 percent in 2016.
Accordingly, "[p]rofit margins remained flat, as revenue and expenses grew at the same rate, but given that the growth rate for each was higher than in 2016, net income also grew more-4.5 percent compared to 4.3 percent. With the modest decrease in equity partner headcount as compared to 2016's increase, 2017's PPEP [profit per equity partner] growth was also comparatively stronger, at 4.8 percent versus 4.1 percent," reported the Citi bankers.
Regional versus National or International
The profit advantage of being a national or international law firm may be dissipating, according to an article in Law.com by Marcie Borgal Shunk, president of The Tilt Institute. The article, titled "Does Geographic Growth Pay Off?," reports that while revenues in absolute terms may be higher for national and international firms in the AmLaw 200, both profits per lawyer (PPL) and revenues per lawyer (RPL) are not. Ms. Shunk finds that national firms, in 2016, generated 27% more revenues than the average 200 firms, however their RPL and PPEP are about the same as the average of firms and their PPLs are lower.
Similarly, international law firms have revenues that are 2.6 times higher than the average 200 firms and their PPEP is 26% higher as well, nevertheless both their RPL and PPL are lower than the average of firms. Importantly, Ms. Shunk finds that the profit margins of national and international firms are lower than the average. While growing from a regional to a national or international firm may bring higher revenues, it may not bring higher profit margins or greater efficiencies.
"In short, the firms who grew from regional to national or international are bigger but not necessarily better. Being national or international is an attractive position with somewhat mixed results. The appeal is not ubiquitous. On a broader scale, the implications for the industry are equally murky. As firms continue to jump on the national and international bandwagon, the system itself will continue to show signs of strain - overcapacity, slowed growth rates and declining profit margins," writes Ms. Shunk.
The Key To Keeping Corporate Clients
A recent article in Thomson Reuters' Legal Executive Institute notes that the number one reason clients switch law firms is a "lack of value." The article, titled "Your Firm's on the Verge of Being Fired, What Are You Going to Do About It?," by Bill Josten, says that 58 percent of corporate clients shift some of their matters from one law firm to another every couple of years. And, 18 percent shift work more than once a year. Corporate clients appear to be taking advantage of flat demand in the legal market and shopping for better pricing from their law firms.
The article reports that when it comes to value most clients are looking for efficiency, cost effectiveness and predictability. Law firms and lawyers that can effectively communicate the value of their legal services and adapt pricing to best suite that needs of their clients have a better chance of retaining existing clients and attracting new ones. "Clients don't want to just pay for something - they want to feel they are buying something of value. The recently released State of the Corporate Legal Department report found that two-thirds of corporations consider it a priority to allocate more work to those outside firms who are delivering value effectively," writes Mr. Josten.
