CA Law Firms Enjoy Another Banner Year in 1998
Macro Business Trends Continue to Reshape the Industry
By Jean Tardy-Vallernaud
California’s legal industry continued to benefit from a strong U.S. economy in 1998, but firms at both ends of the size spectrum face competitive challenges that could reshape the industry in coming years.
The largest firms in LA, for example, are increasingly profitable, but must be watchful for competition from firms based in other parts of the country as well as from the accounting industry. At the other end, mid-sized and smaller firms faced with escalating employee costs will find it difficult to maintain historic profitability levels. However, those firms that have developed strong niche practices with strong revenue streams should continue to thrive.
In conducting our 19th annual Survey of Law Firm Financial Statements, The Citibank Private Bank analyzed information submitted by 253 law firms of all sizes located throughout the United States, including 59 firms based in California, and 26 firms headquartered here in Los Angeles. In reviewing the data, we examined a broad range of business and financial issues specific to the business of law here in the Golden State.
Industry Performance
Profits per partner were up across the board in 1998, but a firm’s size is becoming an increasingly significant factor in determining its partner profitability. On the national level, partners at the largest firms, defined as those with 500 or more lawyers, generated $135,000 more annually, on average, than partners at firms with 301-500 lawyers, and $200,000 more than partners at firms with 151-300 lawyers.
This disparity in partner profitability between the largest firms and those in the next tier reflects an ongoing shift in corporate America’s legal needs. Major corporations increasingly rely on law firms with global reach and broad and deep practice area capabilities. While smaller firms with well-defined practice niches continue to be profitable, this strategy puts a burden on them to be the best at what they do.
Meanwhile, partners at the largest LA firms earned significantly more than peers at mid-sized and smaller firms, and more than partners at firms in other parts of the country as well, with the notable exceptions of New York and Silicon Valley. For 1998, equity partners at large LA firms (301 or more lawyers) earned $717,000 on average, 64 percent more than the $438,000 earned on average by partners at similarly-sized non-New York firms.
This widening profitability gap can be attributed in part to the fact that large firms here in the Los Angeles market have continued to attract, and benefit from, a strong pace of complex corporate transactions.
Merger/Consolidation
Small and mid-sized firms throughout the country are becoming increasingly attractive as takeover targets. Our Survey found that a number of non-LA firms are considering acquisitions as a means for expansion into the Los Angeles market. Conversely, a number of firms in Los Angeles, San Francisco and Silicon Valley are eyeing the New York market for expansion.
External Competition
As noted earlier, big law firms here in LA are increasingly vying for business against major firms for New York, Chicago and San Francisco, as well as some of the big-six accounting firms. In fact, major accounting firms are aggressively looking at acquisitions of law firms, and this trend, which began in Europe, is now beginning to accelerate in the U.S. A 10-member commission of the American Bar Association (ABA) recommended on June 8th that lawyers be allowed to share fees and profits with non-lawyers.
Profitability Management
Firms are reacting to heightened billing competition from peers by keeping strict tabs on expenses, setting formal or implicit productivity expectations for their lawyers, and tying associates’ bonus awards to billing targets. There is also an ongoing drive to improve realization rates and spread collection cycles more evenly throughout the year.
Over the next decade, Los Angeles-based law firms, regardless of size, must continue to focus on effective deployment of capital resources. In particular, more attention must be given to revenue generating strategies to attracting and retaining core talent, at the associate as well as partner level. Those firms that can operate most efficiently, and successfully evolve toward a corporate business model, will continue to prosper in the 21st century.
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Jean Tardy-Vallernaud oversees the Southern California region for The Citibank Private Bank, which maintains extensive relationships with 450 law firms and over 25,000 attorneys located throughout the United States.
