Demand for legal services dropped in the first three months of 2019, and growth of expenses outstripped revenue growth, according to a new survey.
Citi Private Bank Law Firm Group Advisory Services’ flash survey for the first quarter of the year found billing rate increases were strong and were the main driver of revenue growth even as demand declined.
The results contrasted with the more bubbly results for 2018, where law firms enjoyed the largest boost in business since the post-recession period of 2010 through 2017. Demand was up 2.3 percent last year, and down .3 percent in the first quarter of this year.
“There was tremendous demand growth last year and now demand is contracting for the first three months. It’s a challenging set of results,” said David Altuna, a client adviser for the group.
The largest 50 firms by size had been outperforming their smaller counterparts in recent years, but the 2019 results so far put a dent in that result, Altuna said.
The top 50 firms saw a .07 percent decline in demand, he said. The second largest group experienced a 1.2 percent increase in demand, and the second largest 100 firms saw their demand dip .01 percent, according to the survey results. Demand is measured by the number of lawyer hours that are logged.
The drop was driven more by a variety of factors including the government shutdown, market volatility and less merger and acquisition activity, the survey found. Despite that, firm revenues grew 4.5 percent in early 2019, from higher billing rates and collection from 2018 client activity.
But higher compensation expenses, up 7.2 percent, resulted largely from higher pay for associates. Operating expenses went up 5.9 percent as firms spent more on areas like technology improvements and innovation.
At the same time the survey said the collection cycle— the time it takes to collect client bills— has gotten longer.
During the first quarter, law firms added more lawyers, increasing the overall headcount, according to the data, but the total number of equity partners increased only slightly.
The total number of equity, or ownership, partners has been generally been declining in the past decade.
Even as the overall number of lawyers grew, the total hours they logged went down, which resulted in a decrease in productivity.
The bank group’s findings are based on data provided by nearly 200 U.S.-headquartered law firms.
(Added new data from the survey and quotes from David Altuna throughout.)