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A welcome bump in revenue for the third quarter of 2019 combined with a moderating trend in expense growth suggests that law firms have succeeded in mitigating the financial consequences of 2018′s associate salary hikes.

The latest round of figures from Citi Private Bank's Global Law Firm Group shows that for the first time this year, growth in revenue has outpaced expenses. Snapshots from Citi and other market watchers earlier this year based on aggregated figures suggested that many firms were struggling to navigate a market in which demand was wavering and costs were up.

But Gretta Rusanow, head of advisory services for Citi's Law Firm Group, noted the subsequent months had revealed the first quarter to be an aberration, marked by market volatility and the U.S. government shutdown.

"There were better results for the first half than for the first quarter, and that has continued to gain momentum," she said. "I hear that from transactions through to litigation to investigations, we're seeing activity levels improve as the year has progressed."

The Citi results, based on a sample of 190 firms including members of the Am Law 200 and boutiques, showed that revenues grew at 5.1% for the first nine months of the year, compared to 4.1% from just the first half. The bulk of that increase stems from higher rates, which grew 4.7%, compared to demand, which grew 0.9%.

But demand is picking up over the course of 2019, hitting 0.9% over the first three quarters after languishing at 0.1% for the first half of the year.

Expenses, meanwhile, had grown at 5.9% over the first six months of the year. But that number is beginning to dip now that the market is over one year removed from the start of the wave of associate salary increases: it's at 4.7% for the first nine months of the year. Specifically, lawyer compensation growth dipped from 7.3% for the first half to 5.3% over the first nine months, while lawyer head count grew by 2%.

"My hope was that you would see that moderate, and it has," Rusanow said.

Firms have also succeeded in modestly trimming operating expenses, bringing a 4.8% rate of growth from the first half down to 4.3% for the 9-month period.

Still, the news is not good for everyone in the market. Citi found that slightly under half of the firms in the sample saw demand decline in the first nine months of the year. Nonetheless, volatility—measured by comparing firms' 2019 performance to 2018—is also declining, compared to the first half. Then, 51% of firms saw demand increase in the first six months of 2018 and decrease in the first six months of 2019, or vice versa. With nine months in the books, this number is down to 38%.

But firms can take heart in having significant inventory: accounts receivable have increased and unbilled time has grown even more significantly.

"The full year results for 2019 will rest on how much firms are able to collect in these final weeks," Rusanow said.

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