Philadelphia. Photo: Shutterstock

Pennsylvania-based law firms outperformed the rest of the industry in revenue and profit growth last year, and they managed to do so with below-average rate increases, a new report shows.

According to Citi, revenue grew 7.1 percent at Pennsylvania firms in 2018, outpacing the national average of 6.4 percent. Demand growth was higher in Pennsylvania as well, at 2.6 percent, compared with 2.3 percent industrywide. Billing rates, meanwhile, went up by 3.6 percent on average among local firms, versus 4.3 percent industrywide.

“It's more a demand story for them than a rate-growth story,” Gretta Rusanow, head of advisory services for Citi Private Bank's Law Firm Group, said of the Pennsylvania firms. Citi's survey results included 11 Pennsylvania-based firms, she said, including a number of Am Law 100 firms with significant footprints outside the state as well.

Expenses were up 7 percent at Pennsylvania-headquartered firms, which was greater than the 6.1 percent average increase industrywide. That was driven in large part by compensation costs, Rusanow said, which increased by 7.9 percent in the region.

Bradford Winton, a Philadelphia-based banker for Citi, said a majority of firms implemented some increase in associate salaries, even if they did not match the $190,000 starting pay that top-paying New York firms and some national firms adopted. He and Rusanow noted that those raises were only in effect for about six months of the year, so they will have a greater impact in 2019.

“One of the things the lawyers and law firms are dealing with is how they are going to absorb that impact,” Winton said.

But that didn't cause locally based firms to fall behind on profitability—profits per equity partner (PEP) were up 8.1 percent among the Pennsylvania participants, ahead of the 7.5 percent PEP growth industrywide. That's due in part to a smaller equity partner tier at those firms, Rusanow said. Equity partner head count was down 0.8 percent at Pennsylvania-headquartered firms, she said.

But overall head count was up 1.6 percent at locally based firms, beating a 1.4 percent increase across the industry.

“It's more salaried lawyers who are being paid higher salaries as a result of those midyear associate raises,” Rusanow said. As those raises show the full-year effect in 2019, she said, it will be even more important for firms to grow the top line.

Still, with their larger head counts and greater leverage, productivity was up 1.4 percent at Pennsylvania firms, ahead of the 1 percent increase nationally. As lawyers looked to get paid for that work, Pennsylvania firms experienced a bit more of a challenge. They saw the collection cycle lengthen by 3.1 percent, compared to 0.6 percent across the industry.

Inventory was up 10.4 percent in 2018 for Pennsylvania firms, greater than the 7.1 percent increase industrywide. That leaves firms well-positioned for the first quarter of 2019, Rusanow said.

Large Pennsylvania-based firms have been expanding in other states in recent years, including second-tier markets in the Southeast and Midwest. Rusanow said that may be contributing to the smaller rate increases at these firms, if they're adding lawyers in lower-rate markets across the U.S., because Citi's survey takes into account the full firmwide results for each firm, not just the local numbers.

Looking ahead to 2019, in addition to increased expense pressure, firms are thinking about transitioning out aging attorneys and bringing younger lawyers in to fill that need, Winton said. A lot of firms are seeking advice on how to coordinate the movement of their more senior lawyers into retirement on a normal schedule, despite the fact that many are not feeling financially secure enough to retire, he said. At the same time, they're focused on keeping associates motivated, despite what has often become a longer timeline to reach partnership.

“It's just the ongoing life cycle of the law firms,” Winton said, “going from baby boomers to millennials.”

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