Pa. Firms See Demand Growth as Expenses Drag on Profits
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Demand and revenue at Pennsylvania law firms are on the ups, but it's being outpaced by above-average expense growth, a new survey says.
In its legal industry flash survey for the first nine months of 2018, Citi Private Bank found revenue growth of 5.6 percent among the 12 Pennsylvania law firms surveyed, just slightly below the national revenue growth of 6.3 percent. However, when it came to demand, Pennsylvania firms saw a 3.6 percent increase, higher than the 2.5 percent growth nationally, according to David Altuna and Lisa Kohut of Citi.
But along with above-average demand growth, Pennsylvania firms also saw above-average expense growth of 6.8 percent, compared with 5.9 percent nationally.
"On average, Pennsylvania is seeing margin compression," Altuna said.
That is largely due to increased compensation expenses among those firms, Kohut said. Pennsylvania firms saw 10 percent growth in compensation expenses, versus 7.5 percent growth nationally. Among all the regions where Citi surveys, Pennsylvania had the second-highest growth in compensation, Kohut said.
That may be due in part to increased leverage. At the same time, Pennsylvania firms saw lawyer head count increase by 2.3 percent, while equity partner head count was down 1.2 percent.
The wave of associate salary increases that hit this summer would have been fully reflected in this survey only for those firms that were among the first movers, Altuna noted. So firms that waited to implement raises until later may cause additional growth in compensation expenses.
While some Pennsylvania-born firms that maintain a large presence here, like Dechert and Morgan, Lewis & Bockius, moved to increase associate salaries over the summer, others said they wouldn't be considering the issue until later in the year.
Aside from compensation, other expenses among Pennsylvania firms were closer to average. Overhead expenses were up 4.4 percent, compared to 4.7 percent nationally.
Pennsylvania firms saw rates increase by 3 percent, and revenue per lawyer grow by 3.3 percent. Productivity was up 1.3 percent.
"From a top-line perspective, we’re bullish overall in terms of how the industry is going to turn out and Pennsylvania is fitting into that profile," Altuna said. "But we're concerned about where profit growth is going to turn out for the industry, especially in Pennsylvania."
But it's not all troubling. Inventory growth is high nationwide, and Pennsylvania is no exception, with inventory growth of 8.1 percent. How those firms fare in collecting that inventory will shape the rest of the year.
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