Expenses are rising faster than revenue at the nation’s largest law firms, and those in charge of running those firms are running out of ways to manage the imbalance, according to a recent survey conducted by Wells Fargo’s Legal Specialty Group.
The survey—one of three that Wells Fargo conducts on the state of the legal industry each year by polling law firm clients—gathered input from 115 firms on a variety of performance-related categories covering the period from January through June. Of the responding firms, more than half came from The Am Law 100, according to Wells, with the rest falling into the Second Hundred.
According to Legal Specialty Group national managing director Jeff Grossman, who discussed the survey results with The Am Law Daily Monday, reining in costs continues to be a major concern across the industry. “It’s an environment where we’re still expense-focused, and I think it’ll stay that way for awhile,” he says. “I think law firms are more efficient today than they were two, three years ago, but they’re still challenged by the economic environment.”
The survey found that, collectively, revenue rose 3 percent among the responding firms in the first half of 2012, compared to the same six-month period last year. Profits, on the other hand, fell 0.7 percent, in large part because of rising expenses. In many cases, Grossman says, firms moved to strengthen their balance sheets last year by deferring expenses into 2012. That may have helped the 2011 figures, he notes, but wound up dampening profits in the first half of this year. Head count was also up across the board, which drove up firms’ payroll costs. And so far, Grossman says he has not heard of many firms planning to cut attorneys and staff in the second half of the year.
“Profit is a question mark,” Grossman says when asked how he expects firms to close out 2012. “All indicators suggest it’ll be down, but it depends on how firms manage expenses.” Collections, he says, will also play a key role.