Revenue growth and demand at Texas-headquartered law firms trailed the rest of the legal industry in 2019, but the Lone Star State firms led the market in making rate increases stick, a new survey shows.

At first glance, the numbers seem to contrast with a national zeal for Texas growth, expressed by large firm leaders from other regions and playing out in office openings and group lateral moves. But as those out-of-state players seize on opportunities in this hot market, it may be taking away from the performance of locally founded firms.

The mixed results for Texas firms contrasts with a year of solid growth for the legal industry in 2019 that built on even stronger 2018 results, according to a 2019 report by Citi Private Bank's Law Firm Group. Nationally, revenue grew more than expenses, and demand growth accelerated as the year progressed, while rate increases were the strongest since 2008, the report said.

Revenue at Texas firms grew by 3.4% in 2019, less than the 5.3% growth for the industry.

Demand in Texas dropped 1.6%, the worst of the 11 regions in the country, compared with an increase of 1.1% nationally.

But on the upside, billing rate increases by the Texas firms were the strongest for the industry, coming in at 5.7%, compared with only 4.5% growth in billing rates nationally, said Gretta Rusanow, head of advisory services in Citi's law firm group.

The Texas statistics are derived from the results of 10 firms founded in Texas that are included in the national survey. National results come from a total of 201 respondents of various sizes, from Am Law 50 firms to boutiques.

Rusanow said the Texas-founded firms faced a challenging demand environment in 2019, because so many out-of-state firms have opened offices in Texas, "taking clients and matters into their fold."

Because of that, she said, the 1.6% contraction in demand is "not a full picture of the Texas legal industry."

The robust increase in rates charged by Texas firms may be related to using more senior lawyers on firm matters, Rusanow said, noting that lawyer head count at the Texas firms grew only marginally by 0.1%. Head count was up by 1.9% nationally.

"The rate growth number could be the mix of who is doing the work, as well as rate increases being passed on to clients," she said, noting that 2019 marks the second straight year of strong rate increases across the industry.

Expenses were up 4.5% at the Texas firms, a marker that's trending higher than revenue growth. Rusanow said the expense growth was primarily driven by a 5.1% increase in operating expenses.

Inventory at year-end was up 4.9% for the Texas firms, which Rusanow described as a "decent number," even compared to the national statistic of 7.1%. Inventory includes unbilled time and accounts receivable.

Additionally, Rusanow said, the collection cycle lengthened by 1.4% in Texas in 2019, suggesting that the revenue growth in Texas was largely driven by rate increases.

She noted that the Texas firms may be in better shape to start 2020 than 2019, because their inventory was down at year-end 2018 and the firms had shortened the collections cycle, indicating a big collections push at the end of 2018. This year, they started off in the opposite position.

In the Citi report last year, the legal industry posted the best results in a decade, but in Texas, native firms struggled to grow revenue and demand declined.

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