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After leading the pack last year, law firms in California experienced below-average growth in the first quarter of 2019, according to a report by Citi Private Bank's Law Firm Group.

“Both the Northern and Southern California markets trailed national average in terms of revenue growth,” said David Altuna, of Citi Private Bank. According to Altuna, the first quarter revenue growth for Northern California firms was 3.7%, and for Southern California firms was 1.5%, while the national average was 4.5%.

“In both cases, a big driver of this would be the fact collections are really challenged in the entire state,” Altuna said, adding that the California regions ranked No. 1 and No. 2 in terms of the collections slowdown.

The collection cycle lengthened 1% on average, according to Citi. That said, industrywide inventory growth remained relatively strong, at 5.6%, which should bring some collections momentum into the second quarter.

While their collections suffered, California firms reported the highest inventory growth for the first quarter of all the regions Citi surveyed. Northern California firms saw inventory grow 12.7%, and inventory level for Southern California firms increased by 11.4%.

Demand was also stronger in California: it was up 3.1% for firms in Northern California and 0.6% for Southern California firms. Meanwhile, demand dropped by 0.3% on average across the industry, a departure from the record demand growth in 2018.

Nationally, lawyer billing rates continued to increase at the elevated pace that firms experienced in 2018, coming in at 4.4% for the first quarter. But firms in Northern California reported more modest growth of 2.8%, the lowest among all 11 geographic regions analyzed. Southern California firms saw billing rate growth of 5.2%, ranking No. 3 of all the U.S. regions.

California firms also had greater expense growth than in other regions. Northern California firms saw their expenses increase by 8.2% during the first quarter, and Southern California firms experienced a 7.7% increase, both exceeding the industry average of 6.5%.

“In both cases, quite a bit of increase is coming through from lawyer compensation,” Altuna said. In Northern California, lawyer compensation expenses jumped by 10.8%, and in Southern California, they were up 8.8%.

The two regions also experienced increases in operating expenses, as firms continued to invest in office space, technology and project management initiatives, Altuna added.

“To sum it up, it is a slower start for the region,” Altuna said. “But, in some cases, the fundamentals aren't totally off. It is just potentially a timing issue with the collections, which hopefully will correct itself through the year.”

Firms in California continued to add attorneys through the first quarter, following above-average head count growth in 2018. The total lawyer head count at Northern California firms rose by 4.7% and at Southern California firms it was up by 2.6%. Both exceeded the national average head count growth of 1.8%.

Both regions also topped the national average in terms of equity partnership growth. The Northern California region saw its equity tier grow by 2%, well above the industry average of 0.2%. Firms in Southern California grew equity partnership by 1.9%.

Nationwide, lawyer productivity declined 1.8%, reversing the gains the industry saw in 2018. Similarly, Northern California saw productivity decline by 1%, and Southern California watched it drop by 1.9% during the first quarter.

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