Soft demand drags Pa. law firms back down to earth
March 21, 2017 12:00 AM
Reed Smith’s revenue was down 4.3 percent from 2015, and its head count was down 5.1 percent, including the impact of layoffs early in the year.
By Lizzy McLellan / The Legal Intelligencer
Big law firms based in Pennsylvania faced a reality check in 2016, as weak demand for legal services took its toll.
That marks a change from 2015, when a half-dozen top Pennsylvania-based firms beat analysts’ predictions of mid-single-digit growth, and two others came close. The first financial reports of 2016 have shown much less rosy results, at least on average.
And while law firm leaders say there’s no undue cause for alarm, they’re acknowledging a struggle with tightness in demand.
Altman Weil consultant Tom Clay said some firms were able to counter the demand dip in 2015 with strategic and operational moves that included layoffs and rate increases. “Those are one-time strategies unless you’re going to prune the bush every year,” Mr. Clay said.
Meanwhile, he said, firms are adapting slowly to a market that is not likely to see an increase in demand in the long term.
“It was a soft year in terms of new work” in 2016, said Robert Nourian of legal search firm Coleman Nourian. “In our market, the overall legal work isn’t growing and it becomes a zero-sum game.”
Firm leaders across the board said their real estate practices were strong in 2016. Several also cited an overall busy year for litigation. But bankruptcy and restructuring practices in Pennsylvania felt the impact of nationwide softness in those practices.
Dechert CEO Henry Nassau described 2016 as fine for his firm, which posted gross revenue growth of 2.4 percent and a 1.6 percent increase in profits per equity partner, or PPP.
Ballard Spahr chairman Mark Stewart said he expected flatness in 2016. His firm posted revenue growth of 1.2 percent and PPP growth of just under 1 percent. Mr. Stewart added that the firm knew it would be difficult to match 2015, when it posted an 8.2 percent increase in gross revenue.
Despite a revenue decline caused in large part by “head count management,” Reed Smith chairman Sandy Thomas said 2016 was a solid year. The firm’s revenue was down 4.3 percent from 2015, and its head count was down 5.1 percent, including the impact of layoffs early in the year. PPP was about flat, growing by just under 1 percent.
Duane Morris chairman John Soroko said the legal market is suffering from stagnant demand and competing with “disrupters,” including in-house departments and alternative service providers. “Clients are simply finding other avenues for legal services,” Mr. Soroko said.
Mr. Nourian echoed that sentiment. Clients are doing more work in-house and are unlikely to be looking for a new firm, he said.
“That more routine work isn’t getting pushed to outside firms, and that used to be their bread-and-butter revenue,” Mr. Nourian said.
Mr. Clay said the pressure will continue. “This isn’t a blip. This is the new norm,” he said.
Still, some firms — notably Cozen O’Connor and Blank Rome — managed major increases in revenue as they boosted attorney head count. Mr. Clay said the legal industry is playing a “market share game.”
Blank Rome added more than 100 lawyers from Dickstein Shapiro, as well as several other lateral hires, and saw revenue grow by more than 22 percent.
Cozen O’Connor, which grew revenue by more than 10 percent, brought on most of the attorneys from Miami-based IP boutique Feldman Gale, which also had lawyers in California and New York. Later in the year it brought in a group of Florida immigration lawyers from Fox Rothschild.
Cozen O’Connor CEO Michael Heller said his firm has not experienced the demand struggles plaguing much of the industry. He credited the firm’s investments in lateral growth and marketing for its strong demand and revenue.
And one firm, Pepper Hamilton, showed a sharp decline in revenue and profitability, which it attributed to a few factors. The firm’s revenue was down 10.6 percent in 2016 and PPP was down 28.8 percent.
Firm leaders said Pepper Hamilton had its best year by far in 2015, which skewed the trend lines for 2016. In addition, they said, the firm experienced a dip in demand due to the early resolution of two matters in its health effects practice, which is typically a big revenue driver.
Associate salary bumps
Another factor dampening profitability at some firms is the wave of associate salary increases that hit nationwide. Cravath, Swaine & Moore sparked the increases when it raised pay for first-year associates to $180,000.
Mr. Clay noted some firms are responding in part by hiring fewer summer associates. The “big, rich firms” have a fear of falling behind and losing out on talent, he said, but the raises are unsustainable and “irrational.”
“It’s really hurting the smaller firms,” Mr. Clay said.
Few Pennsylvania firms have matched Cravath’s salary scale, but a number gave raises to associates last year. Some of those moves were planned before the industrywide wave of increases.
Dechert raised its first-year salary to $180,000 and announced increases for each class of associates, up to $315,000 for eighth-years and above. The cost only affected the second half of the year and had an impact of $5 million to $6 million, Mr. Nassau said.
Reed Smith, on the other hand, took a regional approach, increasing first-year salaries to $180,000 in some markets, $160,000 in Philadelphia and $145,000 in Pittsburgh. The move was in part due to Cravath’s announcement and was pre-planned in part, the firm said.
Lizzy McLellan: 215-557-2493 or email@example.com. On Twitter @LizzyMcLellTLI.
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