Law firms in Washington have managed to keep gross revenue flat while upping profits by cutting staff and expenses, a trend that puts firms in the nation’s capital slightly ahead of most of the country but slightly behind New York and Southern California. And because 2011 isn’t looking much brighter, more staff cuts may loom on the horizon, according to a survey released by Wells Fargo Wealth Management.
Wells Fargo’s research found that of the 115 firms nationwide that responded to the survey, most reported growth that was virtually flat while New York and Los Angeles saw upticks of 5% to 6%. Washington’s revenue was exactly the same as in 2009. But thanks to a 2.8% reduction in expenses and a 4.8% decrease in total salaries, Well Fargo found that the net income to equity partners in Washington rose by 7.8%.
Grossman said that the reason for the more dramatic revenue increases in New York and California was a result of increased client demand in transactional practices, which were among the hardest hit by the recession.
Though the survey focuses solely on the first nine months of 2010, Jeffrey Grossman, national managing director in Wells Fargo’s legal specialty group, said that he doesn’t expect the last quarter of the year to improve by much.
“In 2009, D.C. appeared to be among the strongest markets in the country in terms of revenue. But in looking at last year’s numbers more closely, a lot of firms were benefitting from contingency payments,” Grossman said. “This year, where the numbers are much more flat, we’re seeing indications that those kinds of payments didn’t occur. It just means that the economic slowdown was slower to come to D.C. than elsewhere.”
Grossman said that Washington benefitted from regulatory work tied to the federal government. But, he said, as has been previously reported by The National Law Journal, delays by Congress and the Obama administration in getting major financial and health care reform passed meant a lag in client demand for regulatory work.
The survey found that while Washington lawyers have increased the amount of hours they are working compared to some other markets, they’re still below capacity figures from before the recession. As a result, Grossman said, firms may be forced to cut more lawyers and staff members in the first half of 2011.
He pointed to secretaries as possible staff members that may see further cuts, citing the fact that firms are asking more lawyers to rely upon a single secretary than in years past. He said that it used to be common for the lawyer-to-secretary ratio to be around 2.5 to 1, but that the ratio is increasingly becoming 3 or 4 to 1.
“All of the figures suggest that there isn’t much growth in the numbers of hours per attorney and many are being underutilized. We’re not exactly entering 2011 with the winds at our backs,” he said.
That said, Grossman noted that there are some positive aspects of the survey’s findings. By cutting expenses, profitability has recovered over the figures for 2008 and 2009, and law firms have been able to increase the amount of capital they have on hand. Additionally, Grossman said, firms have reduced their usage of lines of credit by more than 50% from last year. “That shows that firms’ balance sheets are increasingly strong,” Grossman said.
Among the other trends he is seeing, Grossman said there is an increasing reliance on alternative billing arrangements and that law firms are becoming more efficient in how they manage their projects and businesses. He said that he expects to see more firms bring in non-lawyer business professionals to help manage firm businesses and alternative billing arrangements.
“As alternative billing arrangements become more and more common, firms are going to need help in pricing those arrangements and in managing those projects. Expect to see professionals without law degrees being asked to take over those functions,” Grossman said.