05:03, August 22 166 0 law.com

2017-08-22 05:03:05
First Half Financials Surprise on Strength of Biggest, Most Profitable Firms

FinancialBusinessCharts

Joining a crowd of positive reports on law firms’ first half financial performance, Wells Fargo Private Bank said on Tuesday that the first half was a surprising financial success for law firms, largely thanks to the performance of the largest and most profitable among them.

Revenue rose 5.6 percent compared to the same period a year ago at the 135 firms surveyed by Wells Fargo. The Am Law 50 led the way with 7 percent growth, compared to 6.6 percent for Am Law 100 firms and just under 3 percent for Am Law 200 firms included in the survey.

Despite their top-line outperformance, Am Law 50 firms saw smaller profit increases than their broader Am Law 100 peers due to associate salary increases costing more for the largest firms. The bottom line was up 8 percent for the Am Law 100 versus 6.8 percent for the Am Law 50.

“We were pleasantly surprised by what we saw for the midyear results,” said Joe Mendola, a senior director with the Wells Fargo unit. “Revenue was higher than what we would have speculated, and a nice growth in inventory should bode well for the second half of the year, although six months is a long time. I’m reasonably optimistic for the full-year 2017.”

The Wells Fargo survey echoes trends reported by Citi Private Bank Group and Thomson Reuters earlier this month. Both groups reported that overall revenue and demand increases among law firms were driven by the largest and most profitable firms outperforming their smaller peers.

Demand in the Wells Fargo survey, as measured by total hours billed, rose 1.4 percent overall, with Am Law 50 firms billing 3.2 percent more than a year ago. Am Law 100 firms saw hours rise 2.2 percent, while Second Hundred firms billed 1.3 percent less hours.

There are a number of possible reasons why Second Hundred firms are seeing demand sag further than their larger peers and some reasons are more encouraging than others for those smaller firms.

One reason why billable hours may be down more at Second Hundred firms could be a disproportionate increase of those firms’ clients using alternative fee models or implementing billing caps. A Georgetown University Law Center from earlier this year said that thanks to budget caps, 80 to 90 percent of law firms’ work is now done outside of the traditional billable model.

While that may be a more optimistic cause for the drop among Second Hundred firms, another possible reason is that those firms are more heavily weighted toward litigation, which has been softer in recent years than corporate or transactional work, said Wells Fargo’s Mendola.

Mendola said Second Hundred firms facing a more difficult market should narrow their focus on three to five practices that they feel they can become well-known in as practice leaders.

“Develop a brand around your practice expertise, and be the best or among the best in three or five practice disciplines,” Mendola said. “To me, that would create demand. I think the all-things-to-all-people model in today’s legal world is not necessarily sustainable.”