Despite weakening demand in a law firm market that continues to struggle, 75 percent of surveyed AmLaw 200 leaders are either somewhat (64%) or very optimistic (11%) with respect to their firms when looking ahead to 2013. This finding (barely changed from last year’s 73 percent) and additional results are reported in The American Lawyer’s 10th annual Law Firm Leaders survey, which counted 113 managing partners and chairs as participants.
In terms of predicting how the U.S. economy will perform in 2013, law firm leaders are a fairly optimistic group – while 59 percent of respondents believe that the pace of the recovery will remain the same, a healthy 29 percent believe that recovery efforts will speed up. Only 15 percent believe that it will slow down.
Europe, however, is another story. Firm leaders are far more bearish when asked to predict how the European economy will perform next year. There is an almost even split between those that foresee a decline (43%) or no change (47%), with only 10 percent expecting the European economy to improve. Even so, only 1 percent of respondents indicated that they plan to close any European offices. As Ralph Baxter, chair of Orrick, Herrington & Sutcliffe, summed it up, “The European economy is foundering, and so it’s a less productive setting. But it’s mission-critical to be able to service clients in Europe and do cross-border transactions.”
Other topics that were explored in this wide-ranging survey include practice areas, hiring, firm finances, clients and billing.
As the global M&A market continues to be plagued by lackluster performance, it is no surprise that 40 percent of firm leaders expect their corporate practices to be the most financially challenged in 2013, a 12 percent increase from a year ago. Second-most challenging was real estate (22%), followed by bankruptcy/restructuring (19%) and litigation (15%).
Despite the challenges ahead in at least some of these areas, practices* that expect to add lateral partners in 2013 include litigation (80%), corporate (68%), intellectual property (57%) and real estate (16%).
Intellectual property has been one of the few bright spots for firms over the past year, as reported by Thomson Reuters’ Peer Monitor Index (PMI). However, even IP litigation – a strong performer of late – saw a decline in growth for the first time in nearly two years in the third quarter of 2012, according to the most recent PMI.
Nonetheless, John Murphy, chair of Shook, Hardy & Bacon reports that “Intellectual property litigation is booming. There’s uncertainty out there, but our clients, particularly those in software, are as committed as ever to protecting their intellectual property.”
Most respondents expect their firm’s profits to increase next year. The majority of firms (44%) expect profits per partner to grow 5 percent or less next year, while 32 percent expect more than 5 percent growth. The remainder are looking at flat growth (20%) or a decrease by 5 percent or less (4%). And nearly half of firms plan to use de-equitization, one tactic to boost profits per partner next year. Fifty-four percent of firms have no plans to de-equitize partners, but 46 percent plan to do so, an 8 percent increase from a year ago.
Not surprisingly, given the collapse of Dewey & LeBoeuf earlier this year, firms are concerned about maintaining fiscal discipline and healthy balance sheets. Most firms have managed to keep their debt load low. When asked about each firm’s current bank and other third-party debt as a percentage of its total assets, 78 percent of respondents said that it represented no more than 5 percent. When queried about capital calls, only 23 percent indicated that their firms were likely to make a call in 2013.
Clients and Billing
Because the industry has seen clients demand more value for their legal spend over the past few years, firm leaders were asked about what changes they were currently seeing in client behavior. Seventy-five percent responded* that more clients are requesting discounts, 68 percent said that more clients are asking for alternative fee arrangements and 49 percent said that clients are seeking deeper discounts. In addition, 48 percent said that clients are paying bills later than they have in the past.
Finally, to cope with weak demand in some practices, a wide variety of alternative staffing arrangements* were used over the past year. Secondments were the most popular (77%), followed by contract lawyers employed at the firm or onsite at the client’s legal department (67%). Less well utilized was outsourcing, either to a third party and handled by lawyers (23%) or to a third party and handled by non-lawyers (16%).
For more survey results, please click here.
Posted by Marianne Purzycki
*Multiple responses were allowed.