Practice Management

Law firms are 'poised to grow' as they report more success in lateral hiring

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Law firms have an eye on expansion as revenues continue to grow.

Law firms are planning to add equity partners while at the same time increasing leverage by hiring more junior and temporary lawyers, according to a recently released client advisory by Citi Private Bank’s law firm group and Hildebrandt Consulting.

“Across most revenue segments, firms are poised to grow and are placing even greater emphasis on innovation, efficiency and practice profitability,” the advisory says. “Firms are also expected to expand their equity partnerships, aided by lateral growth strategies that are becoming more successful than we have ever seen before.”

By the end of the year, revenue growth for law firms is expected in the range of 5.5% to 6.5%, according to the client advisory. Next year, revenue growth is expected to continue, reaching a range of 5% to 6%.

The primary driver of growth has been an increase in billing rates, which grew by an average of 4.7% the first nine months of the year. Growth in demand for legal services was lower at just 0.9%, although Am Law 51–100 firms outpaced the overall numbers with a 1.8% rise in demand.

Sixty-one percent of law firm leaders responding to a 2019 Citi survey said they expected to grow their equity partnerships in the next two years. Law firms are expected to increase their equity partner ranks through a mix of promotions and lateral hires.

An additional key finding from the advisory is the increasing anticipation of a recession among law firm leaders. Although Citi Private Bank doesn’t anticipate a recession in 2020, a small majority of the industry’s leaders predict a recession will happen by 2020, and a larger majority predict a recession by 2021, according to a Dec. 11 press release.

“Although 2020 is expected to be a positive year for the law firm industry, it is an opportunity for firms to ensure they are well-positioned should there be a downturn in the market,” said Gretta Rusanow, head of advisory services for the law firm group at Citi Private Bank, in the press release.

Citi and Hildebrandt also expect further growth in leverage, with an emphasis on technology and the hiring of more junior associates, contract and temporary lawyers. According to the 2019 survey, 84% of firms expected to increase their associate numbers, 78% expected to increase permanent lower-cost lawyers, and 58% expected to increase temporary and contract lawyers.

Lateral hiring has proved more successful for law firms in recent years. Law firm leaders responding to the 2019 survey perceived 63% of lateral hires as successful or very successful, the highest number since Citi began surveying firms on the issue.

The key reason for the better success rate is “even greater rigor on the lateral hiring process,” according to the client advisory. Firms are aligning hiring with their overall strategy, improving their due diligence, and working harder to integrate new partner hires.

Although law firm leaders report that their equity partners are receiving more overtures to leap to new firms, the fact remains that most decide to stay, the advisory points out.

“For every partner who leaves a firm following, an approach, an average of eight others chose to stay,” the advisory says.

Why do partners stay? The advisory sees a combination of reasons.

“Our research suggests that partners mainly stay with a firm because they like the firm’s culture,” the advisory says. “And, for many, the combination of culture and compensation is important. Many partners also recognize that the firm’s platform—the extent to which client relationships are embedded—represents an important contributing factor to their own success. Finally, a firm’s past—and projected—financial performance is also an important consideration.”

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