Law firms based in California delivered the strongest revenue growth in 2018, with Southern California firms specifically showing the greatest top-line increases among all U.S. regions, a recent report from Citi Private Bank's Law Firm Group showed.

Southern California-based firms saw revenue growth accelerate to 8.8 percent, the highest rate of all 11 geographic regions analyzed, said John Wilmouth, a senior client adviser in Citi's law firm group. And Northern California firms were close behind, showing revenue growth of 8.4 percent, the second highest rate among regions surveyed.

“I think a lot of that is due to the fact that they added a lot of lawyers,” Wilmouth said.

Both California regions' revenue results exceeded the industrywide average of 6.4 percent. That industrywide number showed improvement from the 4.5 percent revenue growth seen across industry in 2017.

Law firms in both regions also lapped the industry average for demand growth, which was 2.3 percent among all firms surveyed.

Demand at Southern California firms increased by 5.9 percent, which was the highest among all regions, according to Wilmouth. Meanwhile, in Northern California, demand was up 4.6 percent, coming in third among all regions. In 2017, Northern California firms led the industry for demand growth.

To Wilmouth's point about the addition of lawyers at these firms, total lawyer head count in Northern California rose by 3.8 percent in 2018, and in Southern California it was up by 3.3 percent. Both exceeded the national average head count growth, which was 1.4 percent last year—slightly less than the 1.9 percent increase in lawyers in 2017.

“Even though they were adding lawyers, they improved productivity,” said Wilmouth, of the California firms. Typically, when firms hire more lawyers, if the demand doesn't keep up, productivity decreases.

Nationally, law firms saw productivity improve by 1 percent—the first improvement since 2014, according to Citi. Northern California saw productivity improve by 1.1 percent, and Southern California watched it increase by 2.2 percent last year.

However, when it came to billing rates, both regions reported smaller increases in 2018 than in 2017. Firms in Northern California posted a 3.7 percent increase in 2018, while Southern California firms raised rates by 4.3 percent on average. Nationally, lawyer billing rates were up 4.3 percent, compared to a 3.7 percent increase in 2017.

While their top-line growth outpaced the industry, California firms also had higher expense growth than in other regions. Northern California firms saw their expenses grow by 7.1 percent last year, and Southern California firms experienced a 9.2 percent increase, both exceeding the industry average of 6.1 percent expense growth.

“Because they added so many lawyers, their expenses were very high,” Wilmouth said.

To match its high expenses, the Southern California region saw its profits per equity partner (PEP) growth, at 6 percent, lag behind the industry average of 7.5 percent. Northern California, however, saw PEP increase by 9 percent, coming in ahead of the industrywide amount despite above-average expense growth.

Year-end inventory continues to surge for both regions. In Northern California inventory growth was 9.6 percent, while Southern California firms saw inventory increase by 10.1 percent over 2017, Citi found. Industrywide, firms experienced inventory growth of 7.1 percent.

Citi's survey participants industrywide were 190 law firms of varying sizes—44 Am Law 50 firms, 35 Am Law 51-100 firms, 51 Am Law Second Hundred firms and 60 others, which include boutique and niche firms. In California, a total of 27 firms responded to the survey, including 11 firms based in Northern California and 16 firms based in Southern California.

Among all the California firms, eight were boutiques. Six of the eight boutique firms reported revenue growth last year, Wilmouth added.

“The entire country all the regions actually, for the most part, had a pretty good year this year,” Wilmouth said. “Texas is the only one that really struggled a lot in terms of revenue growth,” he added.

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