Wells Fargo Adds to the Consensus: The Law Firm Market Is Setting Records
Enjoy the holiday parties. This has been the best year for law firms since the Great Recession.
December 07, 2018 at 12:03 PM
3 minute read
All the major trackers of the law firm market have said it: 2018 is poised to set a post-recession record for revenue growth.
A survey of 120 law firms by Wells Fargo Private Bank's Legal Specialty Group released Thursday showed revenue grew 7 percent through the first three quarters of the year, buoyed by demand growth of 3.3 percent. The results, Wells Fargo said, “almost certainly assure that the industry will report its strongest annual performance in a decade.”
The report joins earlier bullish broadcasts from Thomson Reuters and Citi Private Bank.
The largest unanswered question is year-end collections, but there are indications that law firms will be busy collecting cash in the final month of the year.
Inventory, measured as total accounts receivable and work in progress, was up 9.6 percent compared with last year. At this point last year, inventory was up 6.6 percent over the prior year.
The country's largest firms appear poised to have the healthiest year, continuing a rich-get-richer trend that has been present for most of the post-recession time period. Revenue at the 50 largest firms, according to The American Lawyer's rankings, was up 8.2 percent, compared with 5.7 percent for the firms ranked 51 to 100 and 2.3 percent for the Second Hundred firms.
A similar pattern among those three groups also was evident for demand, measured as total lawyer-hours logged. The 50 biggest firms saw an increase in demand of 4.3 percent; Nos. 50-100 rose 2.5 percent; and the Second Hundred dipped 0.2 percent.
“What we're excited about is demand has kicked up in 2018,” said Joseph Mendola, senior director of sales with the Wells Fargo Private Bank law firm specialty group.
Firms also reported strong increases in profitability, with income to equity partners up 7.7 percent from a year ago at the same time. That is partly driven by shrinking partner head count. The survey noted a 3.5 percent decline in equity partner full-time equivalents in 2018, with 75 percent of firms reporting a decline in partner head count.
Thomson Reuters last month said demand had hit a post-recession high through three quarters in 2018. Citi Private Bank said demand at the halfway point of the year set a post-2008 record, and that demand and revenue growth had continued through the third quarter.
If there is any reason for concern, Mendola said, it would stem from the possibility that recent increases in leverage could turn from a blessing into a curse in a low-demand environment. Most of the attorney growth of 2.1 percent through three quarters came in the associate ranks, Wells Fargo reported.
“Leverage is a beautiful thing when there is healthy growth in demand,” Mendola said. “But on the other hand, when demand falls off and you have highly compensated people who are not busy, it's a double-edged sword.”
Don't let that spoil the mood at the holiday parties, though. Big Law demand growth is back.
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