A Slow Start for 2014

A Slow Start for 2014

While demand for hours was off in Q1, The Am Law 100 held the line on revenues.

The legal economy got off to a slow start this year. Clients spent 4.8 percent less in fees and paid for 8.8 percent fewer hours in the first quarter of 2014 than in Q1 of 2013. Smaller firms—those outside The Am Law 200—were hit particularly hard, showing 9 percent drops

In both hours purchased and fees paid during the first quarter, compared with 2013. Those are the headline results of the latest LegalView Legal Market Index, which is produced by TyMetrix, the giant electronic billing clearinghouse and data analytics and advisory company.

For the Index, TyMetrix tracks the purchase of legal services by 70 large corporate clients. They include big companies: 21 are in the Fortune 500 and another 12 belong to the Fortune 1000. They operate in eight sectors including financial services, health care, industrials and technology. Those clients hire a lot of law firms: In each quarter they hire at least 180 of the Am Law 200 firms and more than 3,000 others. TyMetrix has tracked the spending for nine quarters, during which time the 70 clients spent $5.6 billion on legal fees.

The LegalView Index is different from other measures of the legal market. It is based on actual dollars paid by clients, not on surveys of law firms. While it’s only a snapshot of the market, it reaches more broadly than other measures. As a result the Index sometimes comes to different conclusions. In May, for instance, Citibank reported that its survey sample of 177 firms showed a more positive picture for the first quarter, finding a 4.3 percent increase in revenue. However, both surveys agreed that the pain was not shared equally and that as a group the larger firms fared better during the first quarter.

In terms of revenue, according to TyMetrix, The Am Law 100 was nearly flat. The 70 Index clients paid those firms $241.3 million, or $982,149 less than in 2013, a dip of 0.4 percent. The Am Law Second Hundred firms took in $68 million, a dip of $1.3 million, or 1.9 percent. By contrast, the 70 Index clients paid all their other firms $249.2 million, or $25.5 million less than in 2013, for a drop of 9.29 percent. All of that means that the 200 largest firms in the nation increased their share of the legal spending by the 70 Index clients from 53 percent in Q1 2013 to 54.4 percent in Q1 2014.

That feat is all the more remarkable considering that all three groups of firms—The Am Law 100, the Second Hundred, and the non-Am Law firms—sold fewer hours to those clients. Measured by percentage, the Am Law 100 firms suffered the sharpest drop in 2014, down 10.2 percent, to 465,016 hours. Yet in terms of gross revenue, market share and hourly rate, the Am Law 100 firms outpaced the others. What’s going on here?

It seems pretty simple. Despite all the talk and worry about their status, future and realization rates, the bigger firms charge more and get paid more. Consider the year-to-year comparison of average blended rates, reached by dividing the total number of hours purchased by the total amounts paid. For the non-Am Law firms, the blended hourly rate actually dropped by 42 cents, to $235.52. For the Am Law Second Hundred, the rate increased by $2.66, to $350.43. But for the Am Law 100, the rate increased by $51.46, to $519.11.

That’s an 11 percent year-to-year increase. Before all the newly hired pricing officers keel over, clearly that hike can’t all be explained by hourly rate increases alone. Most projections for 2014 were modest, closer to 3 or 4 percent. What would account for the rest? Neither TyMetrix nor we know for sure. In part the explanation may rest with the nature of the work assigned—the more complex tends to be more expensive—but complexity can’t be discerned from billing records. And part may be the annual fee step-ups many firms assign to associates.

Whatever the reasons, it would be wise to keep the celebrations modest. Remember that 11 percent increase in effective hourly rates for The Am Law 100 accompanied a 10 percent decrease in hours purchased. That delta can’t keep widening.

Source: The American Lawyer

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