Third quarter survey highlights

Below are third quarter financial highlights for large law firms, according to the latest report by Citibank Private Bank and Hildebrandt Consulting LLC:

• Top firms see demand up; others less so. The uptick in transaction work in the first nine months of 2014 has resulted in demand growth of 2.4% for the AmLaw 50, as compared with the same period last year. Other firms saw lower demand growth, up 1.1% for the AmLaw 51-100 and up only 0.5% for the AmLaw Second Hundred. Demand is measured as total billable hours for the reporting firms in any particular group.

• Modest headcount growth; higher productivity. Headcount growth of 0.6% across all surveyed firms for the first nine months was slower than their average 1.6% increase in demand, equating with some improvement in average lawyer productivity.
• Realization rates remain below historical averages. Realization rates at almost half the large law firms surveyed earlier this year declined during the first five months of 2014, based on another Citibank survey. The report concludes that despite published rate increases this year, a significant proportion of law firms continue to face pressure on realization.
• Profit growth will parallel demand growth. For the first nine months, revenues of surveyed firms grew 4%, vs. margin growth of 2.4%. The report predicts industry profit growth in 2014 to hover in the 5-6% range, with some firms doing much better and a high percentage of firms experiencing profit declines.
• 2015 industry profit growth will be similar to 2014; with wide variability among firms. The report predicts industry demand and revenue growth in 2015 will be similar to 2014 and profit growth will be in the 5% range, but with a performance dispersion at least equal to 2014. The report caveats that it assumes any geopolitical instability in 2015 will not adversely affect global economic growth and transactional activity. The report sees continued strong transactional demand in 2015, but lower demand for litigation.

Overall, the report concludes that the legal profession is stabilizing and will continue to improve, with 2015 seeing a continuation of modest growth.

The results for the first nine months of 2014 are based on 178 firms, including 44 of the AmLaw 50 firms, 35 AmLaw 51-100, 47 AmLaw Second Hundred and 52 additional firms.

What it takes to be a successful firm, according to Citi/Hildebrandt

The report lists 11 trends believed to set apart successful firms:

1. Focus on profitability. Leading firms increasingly focus on profitability of the firm rather than only revenues. They also look a profitability by client, matter, practice area and office, and then use that information to drive changes in client and practice mix and determine partner compensation.
2. Pricing specialists and legal project managers. Large firms are increasingly training their lawyers in matter management (legal project management) and hiring pricing specialists.
3. Managing lawyer leverage. Successful firms are increasingly utilizing temporary lawyers and permanent non-partner-track lawyers. This practice improves leverage by offsetting the effect of the build-up in recent years of expensive counsel and income partners.
4. Technology. Successful firms employ emerging technology not only to improve efficiency, but also to better understand and make decisions about their client and revenue mix and profitability. Successful firms are also likely to be industry leaders in maintaining secure technology systems.
5. Equity partner performance. Successful firms are focused on improving equity partner performance by "exiting" underperformers to make room for talented senior associates, rather than demoting underperforming partners to income status. These firms also bring in talented laterals as needed.
6. Succession planning. Successful firms are improving their handling of practice and client succession from retiring partners.
7. Brand. Successful firms work hard at differentiating their brand by being the market leaders in just a few practice areas.
8. Client focus. Successful firms have industry groups and client teams to better serve their clients. They also spend more time listening to clients' views and needs.
9. Partner collaboration. Successful firms regularly bring partners from different offices together as a way of improving partner collaboration, which can lead to better multi-disciplinary service delivery and cross-selling.
10. Managing talent. Successful firms focus on managing the careers of associates and partners, weeding out underperformers and developing those with high potential.
11. Leadership. Successful firms have strong leaders who manage on a full-time basis, rather than juggling leadership with a client practice.

What the report leaves out

Interestingly, the report does not specifically point out the competitive advantage of re-engineering the way a firm's practice groups deliver legal services, through improved collaboration and efficiency. The report does, though, urge firm leaders to get their partners to adopt a long-term "investment" mindset. One important investment is improving how lawyers in a practice group collaborate, such as by:

• organizing precedents and other firm work product;
• creating checklists for everything - elements of various types of agreements, steps to accomplish a particular type of matter, steps to accomplish a task within a matter, status of documents and other responsibilities of parties in a matter as it progresses;
• improving practice group meetings - which can be the glue of a practice - through frequent meetings, agendas with substantive content, and interactive discussions;
• developing an advanced training program for senior associates and even partners; and
• tracking matter experience in detail, in order to identify similar matters for purposes of fee benchmarking, collecting precedents, identifying lawyers who can answer questions or bring prior knowledge to their work on a matter or preparing pitch books.

Each of these examples requires the practice group to invest non-billable time today in order to reap improved efficiencies tomorrow. For a practice group with less than 100% realization, those efficiencies go straight to the bottom line. My prior blog post and white paper describe profitability improvements for various types of collaboration investments that range from 3-11% each, even after taking into account lost billings for the "investment" in the practice.

Before undertaking this kind of an investment, the firm and affected practice groups should take stock of their strategic focus and align their re-engineering efforts with their strategy. For example, if a practice group is seeking to shed commodity-type work and increase premium work by developing deep expertise in specific areas, it may seek to bring in some lateral partners to enhance the group's expertise. Accompanying this initiative should be an effort to up-train the group's associates and partners in the selected areas, develop checklists and organize the firm's work product, so that the expertise can be most efficiently shared among the group.

Conclusion

The Citibank/Hildebrandt report paints a picture of recovery for large law firms. It also reinforces the point made in the recent American Lawyer report covered in my prior blog that the improving averages mask an increasing disparity in performance among large firms, with a few doing extremely well, many doing somewhat well and many doing badly. The performance differences cannot be explained simply, but the trend suggests there is a formula for success that firms must discover and apply. Citibank/Hildebrandt make their suggestions. I urge that investing in practice group re-engineering be included in the formula as well.

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