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Collecting year-end payments from clients in the fourth quarter is a business imperative for law firms every year. But for large New York law offices, it may be especially critical—and rewarding—in 2017.

According to two banks' legal industry data about the first nine months of the year, New York-based law firms, still facing mediocre demand at best, have been sitting on large stacks of unbilled and billed time, much more than in previous years and higher than the national average. Citi and Wells Fargo legal industry surveys show high inventories for New York firms from January through September, in large part due to higher than average billing rate increases this year.

“It's more important than usual to convert that inventory to cash,” said Gretta Rusanow, head of advisory services at Citi Private Bank's Law Firm Group.

Citi figures are based on a sample of 36 New York-headquartered firms, ranging from small to large. The Wells Fargo data is based on a sample of nearly 20 New York firms, including about a dozen of some of the most profitable firms in the country, with profits per partner at $2 million or more and revenue per lawyer at $1 million or more, according to Jeff Grossman, managing director of banking in the bank's Legal Specialty Group.

Gretta Rusanow of Citi Private Bank's Law Firm Group.

According to the Citi data on the first nine months of 2017, New York firms' inventory, meaning their accounts receivable and their unbilled time, was up 5.4 percent compared with the same period last year, while the industry inventory overall was up 4.6 percent, Rusanow said. “There's an even greater opportunity for New York firms to push for collection at year-end,” she said.

Wells Fargo's survey shows an even higher rate of inventory for New York firms, up 8.5 percent compared with the first nine months of last year, Grossman said. “That inventory growth exceeds any national benchmark or any regional benchmark,” he said.

Rates on the Rise

The growth isn't necessarily a sign of a flourishing market in the city. Rate increases and a slower collection cycle are factors. The collection cycle lengthened 3.4 percent for New York firms, compared with 0.9 percent for the industry, Rusanow said.

The banks' surveys show billing rate increases at New York firms so far this year are higher than the average across the country.

Jeff Grossman of Wells Fargo.

According to Wells Fargo, billing rates were up 4.5 percent for New York firms, while Citi data showed billing rates for New York firms increased 4.7 percent.

For the industry as a whole, rates were up 4 percent in the first nine months of 2017, said Citi's Rusanow. “Rate increases have been a key driver of revenue growth for several years, and they are stronger than usual,” she said.

For instance, at the most profitable firms in the country, said Grossman, the average partner rate is $1,140 per hour, up from $1,085 last year. The average lawyer rate at these firms also increased last year, to $815 an hour from $775, he said. Both those rates increases are above 5 percent.

“In 2016 and 2017, the very profitable group, many of which are New York firms, are seeing the highest rate increases since the recession,” Grossman said.

Going forward, firms in the Am Law 50, 100 and 200 are all, on average, budgeting a 5 percent increase for 2018, according to Grossman. “That will be three years in a row for pretty robust increases for the largest firms,” he said.

Revenue, Demand Slowdown

According to Citi data about the first nine months of 2017, revenue growth for New York firms was up 2 percent, compared with the industry average of 3.6 percent. New York firms had one of the lowest revenue growth figures compared with other regions in the country, Rusanow said.

Wells Fargo's data showed revenue at New York firms was up 6 percent on average, but that sample included a wide range, Grossman said. One firm was up 19 percent, while another was down 9 percent, he said.

Demand growth also didn't look rosy.

According to Citi, demand at New York firms, based on the number of billable hours logged from January through September, was down 1.9 percent compared with the first nine months of 2016, more severe than the rest of the industry, which was down only 0.2 percent. Rusanow said she heard anecdotally from firms that demand levels were down, specifically in transactional work, in the third quarter.

Wells Fargo reported a slight increase in demand for New York firms, with demand up 1.2 percent.

Overall, 2017 is still shaping up to be a positive year for New York firms—at least on average, and if they can collect what they're owed.

“I see 2017 for the New York firms being a relatively good year because their revenues are up nicely for nine months and they're sitting on a nice amount of inventory,” Wells Fargo's Grossman said. But, he added: “For the industry as a whole, it's very challenged.”

With New York firms' expense growth at 2.7 percent—higher than the rate of revenue growth—collecting on inventory will be important for New York firms to close the gap, said Rusanow from Citi. “It really does come down to the last few months,” she said. “So much will rest on what happens with [year-end] collections.”