Wells Fargo Survey: Sluggish Growth for Firms in 2013
A survey of some of the nation's largest law firms finds that the legal industry experienced lackluster growth last year, with gross revenues increasing by just 2.2 percent on average.
The report by Wells Fargo Private Bank's Legal Specialty Group analyzed results from 115 firms—65 of them in The Am Law 100, the rest a mix of Second Hundred and regional firms—and also found that firms' net income essentially remained flat in 2013, improving just 1.6 percent.
Jeff Grossman, national managing director for the bank's legal specialty group, says the survey—which echoes one produced by Citi Private Bank Law Firm Group that The Am Law Daily covered Wednesday—provides a broad perspective on the industry that should be useful to firm leaders as they finalize budgets and consider the year ahead. (As Grossman has noted previously, Wells Fargo releases a more thorough year-end review each spring that includes dollar-figure averages.)
According to the latest survey, last year's growth fell well short of 2012's 5 percent revenue jump—the industry's biggest year-over-year gain since 2008. In fact, 2013 appears to have ended on a slightly down note considering that a Wells Fargo survey released in November showed gross revenue through the year's first three quarters up by 2.5 percent. Nonetheless, Grossman says he was not surprised by the final numbers.
"Unfortunately, these results did not exceed our expectations," he says. "They met our expectations, and our expectations weren't that great."
Top attorneys fared a bit better than their firms overall, according to the survey, with profits per equity partner improving 2.3 percent on average. Grossman says equity partners gained a slight edge despite the industry's generally sluggish growth "because the firms have closely managed their equity partner staffing" either through departures or by making fewer internal partnership promotions.
As in years past, the overall averages don't provide the complete picture of the state of the industry. In discussing the latest survey, Grossman reiterated a point he made last year, when he told The Am Law Daily that there is "a wide dispersion in terms of performance" among firms. He says the best-performing firm among those Wells Fargo surveyed saw its gross revenue increase 20 percent, while the worst-performing firm's revenue fell 21 percent. Similarly, the firm with the greatest gains in net income saw that number jump 32 percent, while the firm at the other end of the spectrum suffered a 35 percent drop in net income.
"A third of the firms in our report had negative revenue and net income results," Grossman says. "So, what you see is that there are some firms that are doing exceedingly well given the conditions in the market, but there are many firms that are under pressure or even some that are in distress."
Grossman says the gap between firms widened between 2012 and last year and that he does not see it closing anytime soon: "In order for [the gap] to shrink, the economy has to improve, especially the law firm economy, because when there was a high demand, everyone was performing well." Now, he says, the best-performing firms are essentially taking business from their underperforming rivals. The Am Law 100 outpaced its colleagues in the Second Hundred in terms of revenue growth "in the 3 percent range . . . and in the Second Hundred revenue growth was about half of that," Grossman says. before adding that the Second Hundred also experienced negative net income and profits per equity partner results.
Such results, Grossman points out, fly in the face of a LexisNexis study released in October that suggested the nation's largest firms—those with at least 750 attorneys—were losing client work to firms in the 201-to-500-lawyer range that the study deemed "big enough."
As The Am Law Daily has previously reported, LexisNexis based its findings on results that showed the largest firms seeing their share of outside counsel spending decrease over the three-year period that ended June 30, 2013, while the "big enough" firms appeared to take on a sizable portion of that work.
The Wells Fargo report also polled firm leaders about how much they expect their revenues to increase this year. On average, Grossman says, those surveyed predicted a 3 percent uptick.
For his part, Grossman says he expects demand to be relatively flat in 2014 and that the firms most likely to experience growth will be those that are most disciplined in terms of managing expenses.
"We feel like we're moving into an era now where you must manage the margins, and expense management is the way to do that," Grossman says. His suggestions to firm leaders: improve efficiency to keep client costs down and limit the office space they occupy to less than 1,000 square feet per attorney.
Unless the industry sees a spike in demand, Grossman says, such seemingly small fixes could make a big difference: "We're expecting another year of winning the field by inches and not by yards."