For the past few years, reports on the market for legal services have felt a bit like ‘Groundhog Day’, in that the same trends repeat themselves over and over — flat-to-slow growth in demand, continued pricing pressure and declining realization rates, etc. etc.
But that’s a journalist’s perspective, and it turns out that law firm managers experience more of a roller coaster ride, according to the folks at Citi Private Bank’s Law Firm Group. They compared law firm managers’ predictions about what would happen in the second half of 2016 with what actually happened — and noted where the two didn’t match up.
A note about the methodology: In April 2016, Citi collected the predictions from one member of the senior management at 155 law firms, including 72 Am Law 100 firms, 39 Second Hundred firms and 44 boutiques. At the end of the year, the same firms opened their financial books to Citi for an analysis of the market for legal services.
Below is our summary of their key findings, and commentary from an interview with Citi’s Gretta Rusanow, head of advisory services, and David Altuna, a client advisor:
Firm Leaders Expected Better Legal Demand
- First, we look at demand, defined as the total number of billable hours a firm logged. Although 59 percent of the firms reported a decline in demand in the second half of 2016 as compared to the second half of 2015, but only 20 percent of those firms predicted that their demand would decline.
Rusanow said that for several years, demand growth has been “very modest at best.” Overall demand for the industry was down 0.3 percent in the second half of 2016, she said. This means that the “overall pie,” or overall market for law firm services didn’t grow, Rusanow added. And yet 80 percent of law firm managers believed they had settled on a strategy that would make their firm the exception.
“Obviously a lot of them are not able to make that prediction or just confident in what they had done and it didn’t pan out,” said Altuna.
Firm Leaders Expected Realization Rates to Improve, They Didn’t
- Second, let’s look at realization rates, defined as what was collected versus what was billed. The law firms in the survey sample experienced a one percent decline in realization rates, meaning clients continue to seek and obtain discounts. Looking at the numbers, 55 percent of law firms saw their realization rate decline, but only 22 percent expected realization to decline.
“Where they did miss on their projections … is realization,” said Altuna. “We continue to hear that pricing pressure is increasing. Folks are asking for discounts.” And yet, many law firm managers expected pricing pressure to abate, he added.
On the flip side, however, 45 percent of law firms improved their realization, Altuna said. “What this could indicate is some of the internal measures that law firms are adopting — managing projects more carefully, better matter management, efficiency improvements — those things could be having an effect on realization,” he added.
More Firms’ Revenue Declined Than Leaders Expected
- Revenue: “Only 13 percent of firms expected a decline in revenue, while 32 percent of firms actually saw a decline,” the authors wrote about their findings.
Law Firms Leaders Understand How to Manage Headcount
- Headcount: Finally, a topic law firm management sees accurately. “Law firm leaders expressed significantly more confidence in their firms’ plans to add associates in the second half of 2016 than to add to other categories of salaried lawyers or to grow the partnership. The projections were born out in part, as the industry saw associate headcount increase 2.3 percent during the period, and equity partner headcount growth was very close to flat,” they wrote.
Rusanow said it makes sense that law firm leaders would be more confident about the fortune of their own law firm than they were about the market. It is rational to believe for them to believe they have a winning strategy, she said.
But the report shows that a positive-bias doesn’t translate into real improvements: “The key takeaway is the positive bias seems to be an essential component of running any business,” said Rusanow. “Any differential further underscored the competitive nature of the business.”
UPDATED: This article has been corrected to reflect that overall demand for the industry was down 0.3 percent in the second half of 2016, not for the entire year.