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Texas law firms kept the lid on expenses during the first nine months of 2019, but demand has declined and collections have slowed, Citi Private Bank's Law Firm Group reported Tuesday.

Expenses grew by only 2% at the Texas firms participating in the survey, a substantially better result than the 4.7% increase in expenses industrywide.

But demand at the Texas firms declined by 3.9% in the first three quarters of 2019, compared with the same period in 2018, while demand grew by 0.9% on average across the industry, according to Citi.

And, while Texas firms had been outperforming the industry in collections during the first half of the year, that marker took a turn for the worse by the end of September. For the first nine months of the year, the collections cycle at the Texas firms lengthened by 5%, compared with 1.5% for the industry.

Citi collected information from a sample of 190 law firms, including 10 firms based in Texas, for the report. In a key finding, revenue growth of 5.1% exceeded 4.7% expense growth for the industry, but that was not the case in Texas where revenue grew by 1.3% and expenses grew by 2%.

Gretta Rusanow, head of advisory services for Citi Private Bank's Law Firm Group, said the positive takeaway from the report for Texas-based firms is the relatively modest expense growth, with the Texas region posting the lowest growth in expenses for the nine-month period. But the declining demand growth at Texas firms—a contraction in work—is a negative, she said.

While 2019 has not been a particularly strong year for the legal industry as a whole, especially compared to 2018, the survey results indicate the Texas market is contracting, she said.

Revenue growth for the Texas-based firms was 1.3% in the first three quarters, according to Rusanow, compared with a 5.1% revenue growth industry-wide.

Rusanow noted that while revenue growth was "fairly tepid" in Texas, accounts receivable at those 10 firms grew by 4.4% and unbilled time grew by 7.8%. That bodes well for the coming months, she said.

"What's happened during this third quarter is we are actually seeing a build up of inventory. The message is it's here to be collected," she said, noting as year-end nears, firms will typically be putting a push on collections anyway.

Still, according to the firms surveyed, the buildup of accounts receivable is a result of slow-paying clients, Rusanow said, and not laxity in sending out invoices.

Total lawyer head count is down 1% in Texas for the nine-month period, which contrasts with an industry that is adding lawyers. With fewer lawyers, productivity declined by 2.9% at the Texas firms during the period, compared with a 0.7% decline for the industry.

But Rusanow said the Texas decline is likely due to the impact of non-Texas-based firms in the market staffing up with lateral hires from the homegrown Texas firms.

"What we report on here is Texas headquartered firms. It's not a comment on the Texas market," she said.

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