Texas firms lagged in revenue growth, a new survey found. Credit: Paul Brady Photography/Shutterstock.com.

The legal industry posted its best results in a decade in 2018, but the story was somewhat  different in Texas, where firms struggled to grow revenue and demand turned down, but still managed to grow profits.

Industrywide, law firms posted strong revenue growth boosted by strength in demand and billing rates, which led to the strongest net income and profits per equity partner since 2007, according to a 2018 report by Citi Private Bank's Law Firm Group.

In Texas, revenue growth lagged, due to a decline in overall demand growth, but increases in net income and profits per equity partner were nevertheless strong.

“It's a bit of a mixed story. In top-line growth, Texas continued to struggle. It trailed all regions in revenue growth,” said John Wilmouth, senior client adviser in Citi Private Bank's Law Firm Group.

For the 10 Texas-headquartered firms in the survey, revenue grew 1.8 percent in 2018, compared with an industry average of 6.4 percent. Citi based its industrywide results on a total of 191 firms, including Am Law 100, Second Hundred and niche or boutique firms.

Wilmouth said a decline in demand growth was a “big reason” why revenue did not improve much at Texas firms in 2018. Demand was down 3.9 percent in Texas, while the industry as a whole saw demand increase by 2.3 percent. Wilmouth said Texas is only one of two regions that saw a decline in demand in 2018.

“It wasn't one or two firms dragging it down—80 percent of the firms in our database for Texas saw a decline in demand,” he said.

On the positive side, Texas firms improved billing rates by 4.8 percent, which exceeded the national average of 4.3 percent.

Also, Wilmouth notes, Texas firms shortened the collection cycle, which shows how well they converted inventory to cash. That helped boost revenue at Texas firms in 2018, but on the flip side does not bode well for first-quarter collections, he said. He said most regions, unlike Texas, saw a big buildup in inventory at the end of the year.

Firms in Texas reduced their lawyer head count by 4.4 percent in 2018, a likely byproduct of the heated lateral hiring market in Texas, while the industry increased their lawyer head count by 1.4 percent. But, Wilmouth said, one big positive in Texas is that the decline in head count was greater than the decline in demand, so productivity increased in Texas by 1.7 percent, compared with a 1 percent increase for the industry.

Texas was the only region to reduce operating expenses in 2018, despite the cost of associate raises that many firms paid during the second half of 2018. Because they reduced expenses, Texas firms posted a 3.9 percent increase in net income, compared with 6.9 percent for the industry. And Texas firms posted a 10.9 percent increase in profits per equity partner, Wilmouth said.

That 10.9 percent increase in Texas PEP beat a 7.5 percent increase industrywide.

Further Reading:

Inside Law Firms' Best Results in a Decade

Texas Firms Lagged in Revenue, Profit Growth in 2017, But Led in Cutting Expenses