For law firms, 2011 was a tale of two years. The strong demand momentum coming into 2011, which continued through the first six months, caused many law firm leaders to believe that a degree of certainty had been attained. The second half of the year was a rude awakening as demand, particularly in transactional work, withered away; it has yet to bloom again. So, while revenue growth in 2011 exceeded the prior year’s, even greater expense growth squeezed margins and resulted in a profits per equity partner increase of just 3.7 percent, versus 7.4 percent in 2010. The 2010 result reflected an industry rebounding from a weak 2009, which made higher year-over-year increases easier to attain—that wasn’t the case in 2011.
Revenue growth of 4.1 percent was due to moderate rate increases, a modest shortening in the collection cycle, and a slight increase in demand. With low year-end inventory growth, the industry might be in for a slow start to collections in 2012, and if tepid demand growth continues into the year, it will create a challenging revenue environment.
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