Los Angeles skyline. Photo Credit: Wikimedia

Firms headquartered in Southern California had the strongest start to the year, reporting the highest revenue and demand among the 11 geographic regions surveyed in a recent report from Citi Private Bank's Law Firm Group.

Overall, California-based firms saw strong revenue growth during the first quarter of 2018. Citi senior vice president David Altuna said that revenue for Southern California firms was up by 10.7 percent so far this year, while revenue for Northern California firms has increased 8.9 percent.

Both regions saw revenue grow more than twice as quickly when compared to the overall U.S. legal industry average, which was 4.2 percent. Altuna said the surge in revenue by California firms was primarily driven by growing demand in regional markets.

Demand in Northern California increased by 4.4 percent during the first three months of 2018. In Southern California, demand was up by 6.7 percent, which was the highest among U.S. regions analyzed. That puts California way ahead of the national growth demand average of 1.3 percent, which was the strongest result that Citi has published since the first quarter of 2016.

“In both cases, it is more of a demand story than a rate story,” Altuna said.

In the case of lawyer billing rates, firms in Northern California posted a 3.7 percent increase during the first quarter. Southern California firms, on the other hand, saw an increase of 4.5 percent in billing rates. Both are lower than the overall 4.8 percent increase nationally.

Although industrywide the collection cycle has slowed by 3.1 percent during the first quarter, Northern California firms, on the contrary, have shortened their collection cycle by 3.3 percent. Firms in Southern California, however, saw their collection cycle shorten by 0.1 percent.

According to Citi, the continued demand growth and the lengthened collection cycle has led to a further accumulation of inventory through the first three months of the year, a time period in which the national inventory levels on average was up 7.3 percent.

Similarly, thanks to the strong revenue growth and slight change in the collection cycle, Southern California firms saw their inventory level increase 10.6 percent, the largest among all regions surveyed by Citi.

“What that means for them is that they have dispersed a strong start, but those firms also have quite a bit of inventory they can still collect on as they move through the rest of the year,” Altuna said.

In Northern California, the inventory level was up by 5.3 percent. Altuna said that is still a solid result that would maintain momentum through year's end.

Firms throughout the Golden State also continued to add to head count. Particularly in Southern California, firms added lawyers at a 3.3 percent growth rate, while the equity partner growth rate increased by 2.5 percent. In Northern California, overall lawyer head count grew by 4.5 percent, while equity partner head count declined by 1.1 percent.

The head count growth of California firms has far exceeded the industry average of 1.8 percent. Nationally, the size of the average partnership declined by 0.3 percent during the first quarter.

For its report, Citi surveyed a sample of 179 firms, including 80 Am Law 100 firms, 47 firms in the Am Law Second Hundred and 52 niche firms or boutiques. Among those firms, 12 of them are based in Southern California and 13 are considered Northern California firms.

When comparing the results by revenue size, Citi found that demand grew only for the top segment of the legal market. These Am Law 1-50 firms also have the greater revenue growth when compared to others.

“It is not a story about big is better. It is more of a commentary on how important brand strength is in this market,” Altuna said. “We feel the commonality between those firms and a lot of the firms in the Am Law 50 is that focus on brand, on firm identity, being close to clients and firm strength.”

In a separate report this week, Thomson Reuters Corp. also found that Am Law 100 firms saw demand rise by 0.4 percent, while nationally the industry average has dropped by 0.5 percent.