Southwest Firms 'Underperforming' the Legal Industry, Bank Survey Shows
The survey results may be an indication that all the new law firm entrants in Texas are making a dent on homegrown firms' bottom lines.
November 25, 2019 at 05:52 PM
4 minute read
Firms headquartered in the Southwest region—largely composed of Texas-based firms—fell short of the overall industry during the first nine months of 2019, according to a new Wells Fargo Private Bank Legal Specialty Group survey.
The bank's survey results could be one indication that all the new entrants in the Texas legal market are making a dent on homegrown firms' bottom lines.
Looking at percentage growth on a year-over-year basis, gross revenue was up only 2.3% for the Southwest region, compared with 6.3% for all firms in the survey, said Joe Mendola, senior director of sales for the private bank group, discussing results of the bank's 2019 nine-month check-in survey.
"The Southwest region has really underperformed relative to the overall industry numbers we've had," Mendola said.
The industry is having a "very, very good year" so far, Mendola has said, but not quite as good as 2018′s record year.
The Southwest region is composed of 10 firms, with most of them based in Texas, he said. They are among 123 firms nationwide that participated in the survey conducted by the law firm lender.
The Southwest region is lagging behind the industry, he said, partly due to a slowdown in some kinds of work for the energy industry, a revenue-driving sector in the region. But a key factor, he said, may be the rapid succession of out-of-state firms launching in Texas and building these offices with lateral hires from homegrown Texas firms.
"Work may have moved over," he said, of the effect of the growing number of new offices.
Texas Lawyer recently reported that nearly half of Am Law 200 firms not based in Texas have at least one office in the Lone Star State.
Southwest-based firms underperformed in other financial metrics too, according to the Wells Fargo survey.
Demand for the first nine months of the year was down 2.5% in the Southwest region when compared with the same period in 2019. For the industry, demand improved by 2.8%, according to the bank.
"That's a swing of over 5%," Mendola said, but noting that those numbers are compared with the first three quarters of 2018, a very robust year.
While margins improved nationally—up by 1.1%—for the nine-month period, they are down 6.3% for the Southwest region, Mendola said.
"What that means is the rate of growth of expenses has outpaced the rate of growth of demand" in the region, he said. Expenses are up by 4.2% in the Southwest region, compared with an overall industry increase of 5.7% for the three quarters.
Inventory growth in the Southwest region is also far behind the industry, he said. Inventory is up 3.6% in the region, compared with an increase of 9% nationally.
Looking ahead to the full year, Mendola said the Southwest region is likely to continue to lag the overall market because of the combination of relatively low inventory growth and lower margins.
"The issue is more of a revenue issue than an expense issue," he said.
A similar nine-month survey conducted by Citi Private Bank's Law Firm Group reported that Texas law firms kept the lid on expenses during the first nine months of 2019, but demand has declined and collections have slowed.
Read More:
Wells Fargo: Texas Firms Lag National Stats in 2018
A 'Very, Very Good Year' for Law Firms? Maybe So, but Not for Everyone
Citi: Texas-Based Firms Managed Expenses, But Collections Slipped
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