For Attorneys, It's the Season for Collecting
While the rest of the western world prepared for the holidays, big firm lawyers, especially partners, were busy with a different task: trying to collect their outstanding bills before the end of the year. For some it was a chance to reconnect with clients; for others, it's a necessary evil to get their (choose all that apply) managing partner, practice group leader, CFO, spouse, off their backs. As the songs say, it's the most wonderful time of the year.
Collecting money in the fourth quarter will be a serious undertaking this year. All the leading indicators—the new LegalView Legal Market Index from TyMetrix, and the quarterly bulletins from Citibank and Wells Fargo—have reported that through September clients have held their purchasing of legal services in check. By those three accounts, the market has either improved slightly or dipped again when compared to 2012. Which means that those partners who've had work this year need their clients to pay up or many of their firms will miss their budget targets. At many firms, the cash-flow cushions of the past, like the concept of equity partner tenure, are just visions of sugarplums dancing in their heads.
The averages tell the stories rather starkly. According to the LegalView Index, through the third quarter of 2013, clients had spent 2 percent less on legal services than in 2012 and had bought 5 percent fewer hours. In this sample of 70 clients (21 of which are in the Fortune 500 and another 12 in the Fortune 1000) across a range of eight industries, spending was down by $38.5 million to $1.85 billion and hours were off by 306,000, down to 5.8 million. While law firms were able to impose hourly rate increases—for bills paid, the blended rates for all firms were up by roughly 3 percent—the drop in demand depressed top line growth.
But again, these are averages and they disguise the turbulence within the market. Demand may be flat, but not everyone is suffering equally. We know that over the last decade the Big Law market has segmented rather sharply. Whether the sample is the Am Law 100 or the full Am Law 200, the gap between the first quartile and the second has widened, gauged by both revenue per lawyer and profits per partner. The growth in the gap outpaced inflation for the decade ending in 2012. One example: the top quarter of the Am Law 200 had revenue per lawyer of about $1.1 million last year, or roughly $300,000 more than the next quarter of firms. A decade ago the gap between the two groups was $188,000.
According to the LegalView Index, the only group that increased its share of clients' wallets this year was the Am Law Second Hundred firms. They went from 10.6 percent of fees to 11.5 percent. Growth is good but some perspective is in order. By comparison the Am Law 100 earned 40.9 percent of the fees paid in the third quarter.
More clarity about client purchasing choices would help explain this often opaque marketplace. But it's difficult to collect and harder to put to good use. A recent attention-getting report from a division of Lexis pointed out that firms with head counts of 250-500 had increased their share of million-dollar litigation matters at the expense of firms with head counts of more than 750. That observation gets less interesting once I'm reminded that the 250-500 lawyer cohort includes such upstarts as Cravath, Wachtell, and Williams & Connolly. Perhaps those client-buying decisions weren't being made on size or price.
Try to collect your fees, but also hug your loved ones. When you come back next month, remember that most of your clients aren't disloyal; they just may not have anything for you to do until the economy turns. Ask them what they need. And while you're waiting, look around for someone or some group who can't afford you and start helping them. No matter what's in your firm's collection plate, you'll feel better in the morning.