(Image: Shutterstock)

Despite trailing in revenue growth in the first quarter of the year, Northern California-headquartered law firms still saw revenue growth of 6.8% in the first half of 2019, outpacing all the other regions surveyed in a recent report from Citi Private Bank's Law Firm Group.

Overall, firms in California have experienced strong revenue growth in the past six months. Running neck and neck in the race, Southern California-based firms saw revenue growth of 6.6%, also exceeding the industrywide average of 4.1%.

Gretta Rusanow, head of advisory services for Citi Private Bank's Law Firm Group, said the revenue growth is the result of a "combination of rate increases and demand growth."

Citi surveyed a sample of 191 firms, including 77 Am Law 100 firms, 54 firms in the Am Law Second Hundred and 60 niche firms or boutiques. Among the 11 geographic regions analyzed, law firms in Northern California saw the strongest demand growth, at 4.3%, in the first half of 2019.

Meanwhile, in Southern California, demand was up 2%, coming in third among all regions. Both outperformed the industry average of 0.1% demand growth.

As another driver for the revenue growth, the lawyer billing rate for Northern California firms increased by 3.4%, lower than the industry average of 4.6%. Southern California firms, on the other hand, saw rates grow by 5.3%, above the industrywide average.

California firms' gross revenue will likely continue to grow in the second half of 2018, said Rusanow, pointing to strong inventory balances at the midyear point. The inventory for firms in Northern California increased by 11.4% in the past six months, and by 8.3% for firms in Southern California firms.

Industrywide, firms experienced inventory growth of 5.8% and a 1.6% lengthening of the collection cycle. Northern California firms' collection cycle lengthened 4.3%, the greatest among among all the regions. The collection cycle Southern California firms was in line with the national average, at 1.6% longer.

"We did see a lengthening in the collection cycle for the Northern California firms," Rusanow said. As a result, "we'll probably see even stronger revenue growth in the third quarter."

The total lawyer head count at Northern California firms rose by 5.3% in the first half of 2019, more than triple of the growth of national head count average, which was 1.7%. In Southern California, head count grew by 3.3%. Both markets have also experienced growth in equity partnership, which was up 1.9% in Northern California and 1.3% in Southern California.

As a result of the increase in head count for salaried lawyers and higher associate salaries, California firms also had higher expense growth than in other regions. Northern California firms saw their expenses grow by 8.5%, while Southern California firms experienced a 7.6% increase, both exceeding the industry average of 5.9% expense growth.

Nationwide, lawyer productivity declined 1.2%, slightly better than the 1.8% productivity decline the industry saw the first quarter. Helped by the increased lawyer head count, productivity for Northern California firms was down 0.6%. Productivity for Southern California firms was down by 1.4% in the first half of the year.

Lee Pelayo, a Palo Alto-based financial professional at Citi Private Advisory, said the growth Northern California has experienced is largely driven by the tech industry in the region as it continues to be a hub for startups, innovative ideas and innovative companies.

"We don't see that trending back, we see that continuing to grow," Pelayo said.

Read More

Law Firm Margins Tighten as First-Half Expenses Outgrow Revenue

Revenue Growth Trailed in California as Collections Slowed: Citi Report

Law Firm Leaders' Confidence Wanes, but Market Optimism Remains