The Hildebrandt Baker Robbins Peer Monitor Economic Index (PMI) rose nine points to 55 for the fourth quarter of 2009. This is the third consecutive quarterly increase for the index, even though demand is light compared to historical levels, and pricing remains weak. For the full year, revenues for Peer Monitor participants fell slightly, down one percent. And profits per partner were flat for the year, due to aggressive cost controls and improved productivity.
Fourth quarter demand for legal services showed signs of stabilizing at roughly the same levels of a year ago and up slightly from the first half of 2009, adjusting for seasonality. However, these levels remained well below those of 2007, in spite of signs of modest growth in cyclical practice areas. Consequently, industry recovery remains slow in the face of challenging market conditions. Pricing and other industry pressures continue to drive changes in the industry as firms strive to manage successfully in the current economic environment.
Demand Analysis by Market
New York City experienced the strongest major market growth in the fourth quarter, up two percent from a year earlier, reflecting improvements in litigation and corporate transactional work. Similarly, London was up five percent. Chicago recorded a fifth consecutive quarter of improving demand, up one-half percent. New York and Chicago were two of the strongest major U.S. markets for 2009.
Washington, D.C., was flat in the fourth quarter, as anticipated strong growth in regulatory work was never fully realized. However, activity appears to be building and it remains forecast for strength in 2010. Boston also was flat. Philadelphia, Los Angeles, San Francisco and Silicon Valley were among the weakest markets, continuing to trail the national averages, as they did for most of 2009.
Demand Analysis by Practice Area
Litigation proved to be one of the more stable practice areas during 2009, up one percent for the year, tracking prior year performance levels for both 2007 and 2008. This reflects the support from high-end litigation combined with the demand drag and cost pressures associated with the overall practice. Activity also continued to hold up well through the fourth quarter (just about flat), although some specialty practice areas were down slightly, including IP litigation, which fell five percent.
Although the rate of growth for bankruptcy has declined slightly since its apparent peak in the second quarter of 2009, it remained one of the strongest practice areas in the fourth quarter, up 11 percent compared with a year earlier. Antitrust work was also strong (up 13 percent), along with patent prosecution (up six percent) and product liability (up two percent).
As expected, some transactional practice areas improved as the year progressed, helped by the recovery in the overall economy. However, despite the improvement, corporate work remains well below pre-recession levels, and 2010 will reveal more about the true strength of the recovery in cyclical practice work.
Other practice areas showing signs of gradual recovery were M&A which was flat, and capital markets, which showed slight growth at 2.5 percent in the fourth quarter.
Rates
Rates remained under pressure in Q4, and are expected to remain so during 2010, as firms carefully navigate what may be the most challenging issue of the year.
Although negotiated worked rates were up 4.6 percent in the fourth quarter compared with the previous year, this result is somewhat misleading, as the increase was largely accounted for by shifts in timekeeper mix, reflecting reductions in head count among associates, and the deleveraging process overall.
Further, when collections are factored into the analysis, rates were flat through much of 2009 due to significant continued pressure in realization, although collected rates improved slightly in the fourth quarter, up about two percent compared to a year earlier.
Expenses
Firms continued to take an aggressive stance in controlling costs in the quarter and for the full year. For the first time since our tracking began, attorney head count contracted, down three percent for the quarter. As a result, direct expenses fell more than five percent – the steepest decline that the index has recorded over the past three years.
Overhead expenses were also down for the quarter, falling almost three percent. On a per-lawyer basis, overhead costs fell at an even faster rate, dropping 4.1 percent, and this trend should continue as the full effects on attorney reductions are felt in the cost numbers.
Appreciating that the growth rates for both direct and overhead expenses have fallen for eight consecutive quarters, these concerted efforts have moved beyond simple cost cutting. The industry is now making permanent changes to the law firm business model, adopting a leaner, more efficient structure. Keeping costs down is now being viewed as a strategic imperative, and not merely a response to a recessionary downturn.
Productivity
Productivity rebounded steadily throughout the year, rising two percent in the fourth quarter – the first increase in the past three years. The improvement is a direct result of head count reductions, deferrals, and the overall hiring slowdown. During 2009, the attorney replenishment ratio5 fell to 0.7 for the overall attorney population, indicating that departing FTEs were being replaced at a ratio of only 0.7-to-1. For associates, the ratio was an even lower 0.6.
Thus, firms are unlikely to resume normal hiring activities this year because in most cases demand will not support the increased capacity and would only serve to weigh down productivity once again. With a swell of deferred associates pending for many firms, any increase in demand will likely be met by deferrals, select scheduled hiring, and possibly contract attorneys.
2010 Outlook
In 2009, the legal market began a gradual recovery from the trough of the economic recession. For 2010, we expect further improvement in demand for legal services, especially in areas like M&A and other transactional practices, as the economy continues to recover. Litigation should continue to see flat to slightly positive growth, although high-end work will perform better. Specialty growth practices like intellectual property should improve, coming off sharply lower demand levels and after experiencing high volatility. And regulatory practices should perform well in the current political and legislative environment.
Despite the expected demand improvement this year, one should be mindful that the industry will continue to operate at levels far below those of recent years, and will likely recover only to 2008 levels through the year. That would still leave demand levels about 2.5 percent below that in 2007. Moreover, client pricing issues will continue to be one of the major management challenges, as momentum from discount pressures persist into the new year.
Revenues are anticipated to be flat to slightly higher for 2010, while we forecast profits per partner to be flat to up 3 percent, based upon continued focus on cost controls and productivity management.
As a result, 2010 may be a year of seeming contradictions,producing better profitability in the face of neutral demand, lackluster hiring, pricing struggles, client pressures, and strategic costing considerations, all operating in an environment of unprecedented change. And if the overall economy were to reverse course toward a double-dip recession, these issues will be exacerbated.
So while these divergences will provide opportunities to excel and differentiate one firm from the next, in fact, pursuing the correct change strategies may be the prerequisite to continued success in 2010 and the months ahead.
For more information, please contact Mark Medice at 412-203-2155 (email: mmedice@hildebrandt.com) or visit peermonitor.thomson.com.
