Hildebrandt/ Citi Client Advisory: Slow Growth For Law Firms in 2010

Considering the contraction in 2009, this isn’t as newsworthy as it might appear. In fact, there is little evidence 2010 will be much better than 2009 according to the Advisory:

“However, while the profession is no longer in crisis mode, we recognize that firms will remain under intense pressure to create new models for pricing and delivery of legal services,” DiPietro said in a news release. “The report addresses these issues as well as the industry’s response to the current market environment.”

I suppose this will lead to another in depth discussion of alternative fee arrangements.  How novel.

Some highlights:

• Realization continues to drop in spite of efforts to raise rates to offset drops in demand;
• Pressure for discounting, fee caps, multi-year rate schedules and alternative pricing increases;
• Increases in “negotiated” rates are being offset by drops in “collected rates”, leading to the lower realization;
• Firms chose to cut expenses, especially compensation costs, to offset losses (a typical reaction);
• Biglaw firms fared better than smaller firms, mostly due to dramatic purging of staff and cost controls;
• Significant improvements seen in 2009 in demand for Mergers and Acquisitions, general corporate, tax, capital markets, and real estate practices;
• Expect further cost cutting measures in 2010 (ie, not likely to be a boom year for technology vendors seeking to encourage firm investment in technology).

A look at the effects on key profit drivers:

• Productivity still in negative growth “driven to some extent by associate pushback on the unsustainable billable hour requirements in many firms”;
• Leverage is increasing to make up for declining productivity (which makes no sense as this drives up costs without adding value);
• Realization, as earlier stated, is in steady decline;
• Expenses had been a source of continual growth until 2009;
• Growth prior to 2009 was consistently driven by rate increases between 6 to 8 per cent annually;
• Expectations for future rate increases are low due to increased client resistance.

The Advisory mentions something that I have touted for years:  the need for improved efficiency to maximize profitability.  During the boom years, it enhanced an already profitable model.  Now, it will be a necessity to offset rate stagnation.

Legal Current has more on the advisory.  To read their take and download a copy of the Advisory, click here.