Tuesday, January 15, 2013
That's the upshot of a new report prepared by Citi's Private Bank Law Firm Group and Hildebrandt Consulting concluding that the halcyon days of BigLaw are over and never coming back. Indeed, the report concludes that "the prosperity [experienced] between 2001 and 2007 was an aberration rather than the norm." At bottom, the legal services industry is burdened with "too many lawyers chasing too little work." The National Law Journal has a nice summary.
The 13-page client advisory, produced by Citi Private Bank's Law Firm Group and Hildebrandt Consulting, lays out a changing law firm landscape—one that sees partners billing fewer hours than they did before the recession while investing more into their firms through capital contributions; associates occupying a shrinking slice of salaried attorney positions; and leaders acting more like businesspeople than lawyers.
Firms "can no longer rely on a rising tide that lifts all boats," the coauthors write. "In fact, the tide is out."
Demand for legal services dropped an average of 0.4 percent between 2008 and 2012, according to the advisory, compared to an average 3.7 percent increase between 2004 and 2008. Rates are rising at a slower pace now than before the downturn, and average revenue growth of 9.8 percent in the earlier time frame compares to just 0.8 percent growth in the more recent years.
"With too many lawyers chasing too little work, pressure from clients to provide discounts and other forms of pricing concessions has become a fact of life in the current market," the paper says. In an interview, Gretta Rusanow, a senior client adviser in Citi Private Bank's law firm group, says firms need to find niche practice areas that clients don't want to bring in-house and that competing firms haven't yet bulked up on. As an example of an area that found success in the past, Rusanow cited the emergence of Sarbanes-Oxley work following the law's enactment in 2002.
Dan DiPietro, chairman of the law firm group at Citi Private Bank, added that firms "can also be just fine" by going after what others consider commodity work, as long as the cost structure is right.
The dip in demand has resulted in average hours per lawyer falling to 1,641 in 2011, versus an average of 1,742 from 2001 to 2007. Partners are likely responsible for most of that lag, since the report notes that associate productivity is returning to prerecession levels. (Generally speaking, large firms often demand between 1,850 and 1,950 billable hours for associates to be eligible to receive a bonus.)
In the year ahead, Citi Private Bank and Hildebrandt say demand for legal services might inch up as the economy improves and as deal activity, particularly in private equity, picks up. Even so, the forecast for revenue growth looks "somewhat weak," according to the advisory.
DiPietro says there are firms "we have some concerns about," kept on a so-called watch list that he first mentioned publicly to Bloomberg in October. Heavy lateral churn, high bank debt, weak leadership, and cracks in firm culture are all possible warning signs, he says, though he doesn't think any firm is in "imminent" danger.
Then again, he concedes that the bank's "powers of prediction" are not 100 percent, saying they weren't able to see years in advance that now-defunct firms the bank lent to were on the brink (Such firms include Thelen, Howrey, and Dewey & LeBoeuf). "If we were [able to predict that], we would have exited as gracefully as possible," he says.
The bottom line, according to the report, is that the prosperity between 2001 and 2007 was an aberration rather than the norm: "We think it is time to let go of any lingering notion that the industry will revert to the boom years before the Great Recession any time soon."