Friday, August 17, 2012
Citi's Private Bank Law Firm group predicts poor growth for law firms in 2012 as well as continued pressure to lower billing rates. These predictions are based on surveys distributed to 176 firms including 79 Am Law 100 firms, 47 "Second Hundred" firms, and 50 smaller firms along with "extensive discussions" with law firm managers. Here are some highlights of the Citi report courtesy of AmLaw Daily:
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.
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The Am Law 1–50 and non–Am Law 200 firms saw demand decline, and for The Am Law 1–50, the second quarter saw an acceleration of the decline experienced during the first quarter. Though the Am Law 51–100 and Second Hundred firms saw demand growth for the first half of this year, it slowed from the first quarter to the second quarter.
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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.
Looking ahead, a weak increase in inventory (1.8 percent growth in mid-2012, compared to 6.3 percent 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.