Law Firms Struggling to Keep Up With Rising Expenses

Article by Sara Randazzo


http://www.americanlawyer.com/PubArticleALD.jsp?id=1202571667870

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 covering the first half of the year gathered input from 115 law firms. According to the survey 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, the survey says, firms moved to strengthen their balance sheets last year by deferring expenses into 2012. That may have helped the 2011 figures, the survey notes, but wound up dampening profits in the first half of this year. Another issue facing law firms was head count was up across the board, which drove up firms' payroll costs.

The amount of work coming in to the law firms has been fairly stagnant. Firms have been able to generate some additional money by raising their rates—something that seems to happen each year without fail. According to the survey, rates were up about 3.7 percent on average in the first half of the year. The average hourly rate being billed by attorneys across all levels at the surveyed firms was $560.

The use of lines of credit provided by banks to the law firms rose 14 percent during the first half of the year. The survey also found that one in three responding firms were carrying an underfunded pension liability of some kind, with a half-dozen firms reporting between $10 million and $50 million in unfunded pension liabilities.

Wells Fargo also asked about a topic that has become of great interest in the wake of Dewey & LeBoeuf's demise: how many lateral hires command compensation guarantees. The law firms surveyed reported giving 4 percent of their lateral hires guaranteed compensation for one or more years, representing less than 3.5 percent of firm profits.