Law firm performance dropped off in the third quarter, as demand softened and collections started to lengthen, according to a new report by the Citi Private Bank Law Firm Group.
Released Monday, the data is based on a survey of 183 law firms, including 129 of the nation’s largest firms and 54 boutiques.
“One of the keys is that revenue growth decelerated in the third quarter,” said John Wilmouth, a senior client advisor with Citi Private Bank.
Specifically, revenue growth fell to 3.6 percent through the first three quarters, down from 3.7 percent at this time last year. Although the difference is small, Wilmouth said that the growth was driven by increased billing rates, and not demand or other factors, which may not bode well for law firms.
Law firms increased billing rates by four percent, on average, he said. Last year, at this time, billing rates were only up 3.2 percent. It is more typical to see a 3 to 3.5 percent increase in billing rates, he said.
But the higher than normal rate increases may not necessarily be good news. The rate increases were logged, and had not yet been collected, so they could end up being discounted, Wilmouth said.
“Most firms continue to see a growth in revenue because even though demand for their services may be flat, they’re still increasing their rates,” he said.
Digging deeper, Wilmouth said the third quarter data shows several areas of potential concern for law firms:
- Demand for law firms’ services, defined as the total amount of hours billed by all timekeepers, was down .2 percent. Last year, at this time, it increased by 0.3 percent.
- Looking ahead, the amount of unbilled time, or work that is still in progress was only up 2.4 percent compared to around 3.6 percent last year. “This is the work that will probably be converted into cash in the first quarter,” he said. “It suggests that the revenue pipeline headed into next year could be a bit weak.”
- Collection, or the time that elapses between when a law firm logs a matter to when it receives cash for its work, grew longer in the third quarter. As a result, the law firms surveyed have built up more accounts receivables than at any time since 2008, said Wilmouth.
- The fourth quarter is traditionally the strongest quarter for many law firms because the industry generally operates on a cash basis — meaning firms can book revenue only after they receive cash — and there is a strong push to collect on outstanding bills before the end of the year. While the build up in accounts receivable could portend a strong fourth quarter, it could also indicate that clients are delaying payments. “I don’t think we know enough to say whether clients are slowing down [payment on bills] for one reason or another,” he said.
- Expenses hit 3.8 percent compared to 3.4 percent last year, which the report attributed to salary increases to associates and up the ladder to of counsels and junior income partners.
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