Legal Market Stabilizes, Poised For Growth in 2015

A 2015 Client Advisory issued by Citi Private Bank detailing the state of the legal industry finds that large law firms are in a better position to hope for steady revenue growth from 2014 into 2015.

The report predicts that demand for legal services will continue to maintain at stronger levels than they were in 2013. But the Citi report also points out that growth could be thinned by an increased amount of legal work being outsourced to nontraditional players in the legal market, such as accounting firms, a development detailed by our ALM sibling The American Lawyer this summer. See, “Accounting Firms Make New Foray into Legal Services.”'

Though demand for legal services continues to rise, Citi's analysis finds that the market for litigation services is gradually shrinking, contrasting an uptick in outside counsel sought for transactional matters. The report finds that companies are more likely to seek settlements and other alternative solutions to disputes rather than fight to the end of the case as a result of the higher costs of complex litigation and fears over unwanted media exposure. The Citi report suggests that the proliferation of lower-cost, nontraditional legal service providers further affects the profitability of big firms relying on litigation.

“This trend, the decline in demand for litigation work in law firms, will be in place at least through 2016 and may go beyond,” says Dan DiPietro, chairman of Citi Private Bank's law firm group.

The study by DiPietro and his team also found that the Am Law 50 outperformed the rest of the Am Law 200 by gross revenue during the first nine months of 2014, mostly benefiting from an increase in transactional work this year.

However, the Citi report also indicates striking differences in the performance of individual firms across all tiers that has continued since the second half of 2013, even within the top 50 firms, about 28% of which experienced a decrease in demand for legal services during that timeframe. Big firms between the Am Law 50 and 100 mark, as well as the Second Hundred, saw more drastic dips in demand, at 45% and 46%, respectively.

The Citi report lays bare what many in the legal industry have been claiming for some time ' the success of the top-tier firms has come at the expense of those further down the Am Law 200 ladder.

“If a firm outperforms the average of the industry, the success must come at the expense of some other firms declining,” DiPietro says.

Growth in demand among the Am Law 50 firms was much stronger than that of those firms in other tiers. The Am Law 50 experienced a demand growth of 2.5%, while those firms in the Am Law 51 through 100 tier saw 1.1% in demand growth, with the Second Hundred coming in at 0.5%. The stratification in growth becomes clearer when one looks at the 10 most profitable firms, which enjoyed 6.5% growth compared to the industry average of 1.2%, according to the Citi report.

Citi's client advisory offers insights into where big firms can anticipate future growth. DiPietro says that lateral acquisitions are often the most effective and popular strategy to stimulate business development. He adds that lateral partner and associate moves ' of those either looking for better compensation or exiting due to poor performance ' would work in the benefits of leading firms because it helps those firms improve the quality of the team.

“The laterals would fuel the growth of firms and then lead to consolidation within the industry, promoting mergers and combinations which could further fuel the growth,” DiPietro says.

The Citi report points out that there have been more lateral moves among the top 25 firms this year, which reflects those firms' increased expectations in the performance of equity partners. As previously reported by our ALM sibling The Am Law Daily , the confidence of managing partners in promoting full-time equivalent equity partners decreased in the third quarter. See, “Managing Partner Confidence in Legal Industry Slowly Grows.”'

The report reveals that there was only a 0.4% increase in net headcount of full-time equivalent equity partners in Am Law 50 during the first nine months of 2014, and that this population dropped 0.2% among Am Law 51 through 100 firms.

Nonetheless, the Citi report suggests that the need for mid-level associates is increasing. As compared to the slowdown in hiring of lawyers from that peer group a half-decade ago, the increased productivity of mid-levels in recent years has them in high-demand. Of course, DiPietro's group also raises potential red flags due to the increased compensation necessary to hold on to mid-level talent.

The Citi client advisory also recommends 11 strategies for firms seeking success in the current market. One of them, says DiPietro, is brand differentiation.

According to the report, Am Law 50 have largely benefitted from brand differentiation because they remain the “go-to” firms in selected practice areas in a fragmented market. DiPietro notes that leadership can also play an important role in the business development, as “decisions have to be made faster in terms of how to grow and where to grow.”

Wenxiong Zhang writes for The Am Law Daily, an ALM sibling of Accounting and Financial Planning for Law Firms.

A 2015 Client Advisory issued by Citi Private Bank detailing the state of the legal industry finds that large law firms are in a better position to hope for steady revenue growth from 2014 into 2015.

The report predicts that demand for legal services will continue to maintain at stronger levels than they were in 2013. But the Citi report also points out that growth could be thinned by an increased amount of legal work being outsourced to nontraditional players in the legal market, such as accounting firms, a development detailed by our ALM sibling The American Lawyer this summer. See, “Accounting Firms Make New Foray into Legal Services.”'

Though demand for legal services continues to rise, Citi's analysis finds that the market for litigation services is gradually shrinking, contrasting an uptick in outside counsel sought for transactional matters. The report finds that companies are more likely to seek settlements and other alternative solutions to disputes rather than fight to the end of the case as a result of the higher costs of complex litigation and fears over unwanted media exposure. The Citi report suggests that the proliferation of lower-cost, nontraditional legal service providers further affects the profitability of big firms relying on litigation.

“This trend, the decline in demand for litigation work in law firms, will be in place at least through 2016 and may go beyond,” says Dan DiPietro, chairman of Citi Private Bank's law firm group.

The study by DiPietro and his team also found that the Am Law 50 outperformed the rest of the Am Law 200 by gross revenue during the first nine months of 2014, mostly benefiting from an increase in transactional work this year.

However, the Citi report also indicates striking differences in the performance of individual firms across all tiers that has continued since the second half of 2013, even within the top 50 firms, about 28% of which experienced a decrease in demand for legal services during that timeframe. Big firms between the Am Law 50 and 100 mark, as well as the Second Hundred, saw more drastic dips in demand, at 45% and 46%, respectively.

The Citi report lays bare what many in the legal industry have been claiming for some time ' the success of the top-tier firms has come at the expense of those further down the Am Law 200 ladder.

“If a firm outperforms the average of the industry, the success must come at the expense of some other firms declining,” DiPietro says.

Growth in demand among the Am Law 50 firms was much stronger than that of those firms in other tiers. The Am Law 50 experienced a demand growth of 2.5%, while those firms in the Am Law 51 through 100 tier saw 1.1% in demand growth, with the Second Hundred coming in at 0.5%. The stratification in growth becomes clearer when one looks at the 10 most profitable firms, which enjoyed 6.5% growth compared to the industry average of 1.2%, according to the Citi report.

Citi's client advisory offers insights into where big firms can anticipate future growth. DiPietro says that lateral acquisitions are often the most effective and popular strategy to stimulate business development. He adds that lateral partner and associate moves ' of those either looking for better compensation or exiting due to poor performance ' would work in the benefits of leading firms because it helps those firms improve the quality of the team.

“The laterals would fuel the growth of firms and then lead to consolidation within the industry, promoting mergers and combinations which could further fuel the growth,” DiPietro says.

The Citi report points out that there have been more lateral moves among the top 25 firms this year, which reflects those firms' increased expectations in the performance of equity partners. As previously reported by our ALM sibling The Am Law Daily , the confidence of managing partners in promoting full-time equivalent equity partners decreased in the third quarter. See, “Managing Partner Confidence in Legal Industry Slowly Grows.”'

The report reveals that there was only a 0.4% increase in net headcount of full-time equivalent equity partners in Am Law 50 during the first nine months of 2014, and that this population dropped 0.2% among Am Law 51 through 100 firms.

Nonetheless, the Citi report suggests that the need for mid-level associates is increasing. As compared to the slowdown in hiring of lawyers from that peer group a half-decade ago, the increased productivity of mid-levels in recent years has them in high-demand. Of course, DiPietro's group also raises potential red flags due to the increased compensation necessary to hold on to mid-level talent.

The Citi client advisory also recommends 11 strategies for firms seeking success in the current market. One of them, says DiPietro, is brand differentiation.

According to the report, Am Law 50 have largely benefitted from brand differentiation because they remain the “go-to” firms in selected practice areas in a fragmented market. DiPietro notes that leadership can also play an important role in the business development, as “decisions have to be made faster in terms of how to grow and where to grow.”

Wenxiong Zhang writes for The Am Law Daily, an ALM sibling of Accounting and Financial Planning for Law Firms.