2017 has been a big year for law firm mergers, and 2018 is likely to follow suit, according to analyst predictions at Citi Private Bank.
In a 2018 client advisory released in conjunction with Hildebrandt Consulting on Thursday, Citi analysts said they expect modest growth in law firm revenues and profits-per-equity partner. High variability in individual firm performance will continue to drive consolidation, they said.
“Firms, in a market where they’re experiencing a few years of declining results, will have the appetite to look for a merger partner or be acquired in order to remain successful,” said Gretta Rusanow, who heads the advisory group for law firms at Citi Private Bank and co-authored the report with Brad Hildebrandt.
Firms in the AmLaw top 50 fared better thus far in 2017 than the rest of the industry, according to the report. But Rusanow said that doesn’t mean smaller firms won’t succeed.
“Size isn’t everything, and brand is more important,” she said. “You can be a boutique firm and have very strong performance because you have built that strong brand.”
The report is based on Citi’s quarterly survey of roughly 180 US-based law firms, an annual survey of 193 US-based law firms, a survey of law firm leaders in 55 large international law firms, and informal conversations with law firm leadership conducted by Citi analysts.
In 2017, Citi analysts found that law firm revenue was driven primarily by rate growth rather than a growth in demand for services.
And yet, despite this slight decline in demand, firms added to their headcount at a 1.7 percent pace, driving lawyer productivity down 0.6 percent. The headcount growth has been primarily in the junior ranks of firms, according to Rusanow.
“Only a minority of firms are projecting that they will grow their income partners and counsel,” said Rusanow. Equity partnerships remain flat, she said.
Rusanow said it remains unclear how firms will be impacted by the coming “onslaught” of baby boomer retirements in the next few years. At some firms, a third of equity partners are nearing retirement, she said.
Law firms should also keep an eye out for competition from alternative legal services providers, in-house legal departments, and the Big Four accounting firms, which have made inroads in Europe and the Asia-Pacific region, according to Citi.
The Big Four do not yet have the legal capabilities to challenge big law firms, but they have established client relationships and are “set up for large-scale legal work that is begging for tools like AI,” according to Rusanow.
“The Big Four accounting firms may not be entering the US market at this stage, but given that growth for many firms will come from cross-border work, it helps to pay attention to what the Big Four are doing outside the US,” she said.
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