Bank Report Shows Partner Productivity Lagging in Pa.
Pennsylvania law firms need to address the glut of partners in their ranks before rising expenses eat away at the revenue gains they are making, recent surveys by two large banks indicated.
In looking at financial results for the first nine months of the year, Mary Ashenbrenner of Wells Fargo's legal specialty group in Philadelphia cautioned the region's law firms to aggressively manage expenses as well as the productivity of its most senior lawyers.
The Wells Fargo survey, which compared where firms stood after the first nine months of 2013 compared to the same time period in 2012, had some bright spots for Pennsylvania-area firms.
Aside from Southern California firms and those firms with profits per equity partner greater than $2 million, Pennsylvania fared better than anywhere else in the country when it came to growing top line revenue.
Ashenbrenner said gross revenue was up 3.1 percent in the region compared to a 1.4 percent rise nationally. Revenue increases were not thanks to a growth in demand, which Ashenbrenner said is expected to be down for some time to come. Rather, firms are raising rates—at the rate of 2.6 percent in the Pennsylvania area and 3.4 percent nationally, she said.
A similar survey by Citi Private Bank Law Firm Group also found that Pennsylvania was one of the best markets in the country when it came to increasing revenue, though John Wilmouth, a senior client adviser with Citi, said it had more to do with an increase in hours per lawyer than it did with rates rising. The Wells Fargo survey found hours per lawyer in Pennsylvania were down, while the Citi survey found the hours were up. Either way, both surveys found expense gains were outpacing revenue gains in the region.
The strength of Pennsylvania's revenue numbers is a testament to the "value play" the region represents, Ashenbrenner said. She said the area's firms are viewed as providing quality work for reasonable prices. Pennsylvania firms are also more likely to engage in alternative fee arrangements—at a rate of 14 percent compared to 10 percent of firms nationally that implement AFAs, she said.
According to Ashenbrenner, the high-profit firms had strong revenue growth in the past 12 months because of some large M&A deals and litigation. For "bet-the-farm" work, Ashenbrenner said, clients are going to the high-profit law firms, but otherwise clients are seeing the value of Pennsylvania firms.
But in order to turn that revenue into profits, Pennsylvania firms are going to have to take a serious look at their partner numbers, she said.
"Firms continue to be reluctant or hard-pressed to deal with overcapacity," Ashenbrenner said. "And it's at the senior levels." Expenses in Pennsylvania rose 4.2 percent during the time period tracked by the Wells Fargo survey. That is compared to a 1 percent rise in expenses nationally. Much of that increase in Pennsylvania has to do with the cost of attorney headcount, Ashenbrenner said.