Law firm revenue growth moderates as expenses grow; top 50 firms see biggest productivity drop
Revenue growth for law firms was “a modest” 4.1% for the first nine months of 2022, compared to growth of 14.7% in the same period last year, according to a client advisory by Citi Private Bank’s law firm group and Hildebrandt Consulting.
“Firms are now carrying more lawyers at higher salaries who are comparatively less productive than we saw in 2021,” according to the report.
The advisory said Citi Private Bank and Hildebrandt Consulting have “heard anecdotally” that some firms are addressing the decrease in productivity by giving tougher performance reviews this year and “managing out” poor performers among newer hires.
The advisory also referred to anecdotal reports that firms are seeking to improve collections by asking clients for progress payments in some transactional practices and by selling receivables to “monetize part of their inventory.”
The report noted that most of the decline in demand has been concentrated in the nation’s 50 top-grossing firms. In that segment, demand decreased 1.9%, while head count was up 5.9%, resulting in “the most notable drop in productivity across all segments.”
The report cautioned that demand growth should be compared with 2019, the last of the more “normal” years before the COVID-19 pandemic and the “unusually strong performance” in 2021.
“We expect that many firms will see a decline in profitability in 2022, compared to the extraordinary results of 2021,” according to the report summary. “However, looking at average annual profitability growth since 2019, we believe that the law firm industry has performed very well.”
The report is based on data collected from mostly larger U.S. firms by Citi Private Bank and conversations with firm leaders.