The U.S. law firm industry had another strong year in 2019, according to a report from Citi Private Bank's Law Firm Group set to be released Wednesday, and revenues for 2020 are predicted to continue growing at a healthy clip.

The report, co-authored by Hildebrandt Consulting, found that after a slow start to the year, firms progressively improved their financial performance, and are expected to grow revenues between 5.5% and 6.5% over the course of the full year.

The authors of the 2020 Citi Hildebrandt Client Advisory are also optimistic about 2020, contending that a recession is not likely and revenue growth will likely hit between 5% and 6% again. That's contrary to a small majority of industry leaders who predict a downturn in the next year, and a larger majority who predict one in 2021.

"The fundamentals are still positive," said Gretta Rusanow, head of advisory services in Citi's Law Firm Group. "We have seen the demand environment improving from one quarter to the next, so it's moving in the right direction."

Still, on the whole, demand lagged behind 2018, growing at 0.9% over the first nine months of the year. Consequently, firms can attribute more of their revenue growth to increased rates. Over the first nine months of 2019, these grew at the highest rate since before the Great Recession, hitting a clip of 4.7%.

Demand growth was more balanced across the marketplace, compared with 2018, when the Am Law 50 and smaller boutique firms experienced standout performances. The best-performing Am Law 200 segment was the Am Law 51-100 firms, which reported a 1.8% rise in demand. The Am Law Second Hundred firms also outperformed the Am Law 50, with demand growth of 0.9%.

Rusanow noted that the largest firms on the list still did well, though they set the bar high with their 2018 performance.

"Still, it's very positive to see other segments report even stronger growth, albeit off of a smaller base in 2018," she said.

Smaller firms, meanwhile, are inherently subject to greater variation in their financial results.

"While its true that the smaller firms have not been at the performance level they saw in 2018, I think that's a function of their size," Rusanow added. "I'll be interested to see what happens in 2020."

The report also predicted that demand will remain robust across practice areas. In spite of concern among firm leaders about the future growth prospects for litigation, the principals are optimistic about the sector. Demand for M&A work continues to be strong, investigations work has not slowed, and firms have also been building up their bankruptcy and restructuring practices.

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Growth Across the Leverage Pyramid

The report also identified an active lateral recruiting market, combined with a majority of firms hoping to grow the size of their equity partnership in the coming years.

"The success rate of laterals has improved. In the past, half the laterals weren't really accretive to the firm," said Brad Hildebrandt of Hildebrandt Consulting. "But firms have become much more cautious about who they're hiring."

That's a consequence of greater due diligence and rigor in identifying the opportunities that come with new hires. Improving the integration process has also made a difference. Hildebrandt added that firms have proved more successful in integrating groups than in adding individual partners on a one-off basis.

This eagerness to add talent at the top of the leverage pyramid will likely continue, with 61% of leaders surveyed saying they aim to add equity partners in the next two years.

But firms are also projecting growth across the pyramid, with 58% looking to add income partners and 84% looking to add associates over the same interval. Majorities also expressed a desire to grow the ranks of contract attorneys and permanent lower cost attorneys, indicating a tilt toward investment in a less extensive, more flexible leverage model.

"This isn't about growth for growth's sake," Rusanow said. "It's about growing it in a thoughtful and strategic manner."

Many firms are also looking to add other time-keepers, a category that includes e-discovery personnel, specialist advisers, project managers, professional support lawyers, patent agents, technology professionals and law clerks. Rusanow flagged project managers in particular.

"If you establish that clients of law firms are looking for more efficient delivery of legal services, part of it is more cost-effective lawyers, part of it is the project aspect of large-scale matters, whether they are on the transactional side or the litigation side, and the addition of project manager who are able to be charged out to clients makes a difference," she said.

Even with the general optimism about the direction of the market, firms would be wise to be prepared for a downturn, and careful in how they address one. Cutting junior associates runs the risk of creating a hole in the crucial category of experienced associates in their fourth and fifth years when the market eventually recovers. Meanwhile, according to Rusanow, it's not unusual for firms to be paying income partners more than they generate in revenue.

"While it may be harder to right-size among more senior, more long-term income partners at the firm, we do point out that it would be prudent for any firm to examine the profitability of all leverage categories, from senior to junior," she said.

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