U.S. Law Firm Industry wraps up one of the strongest years on record with growth levels not seen since pre-2008
Citi Private Bank Law Firm Group and Hildebrandt Consulting today released their 2022 Citi Hildebrandt Client Advisory, which establishes the broad landscape for the law firm industry, how firms are responding to industry, economic and market challenges, including with progress in tackling the Covid-19 pandemic, and their best opportunities for growth in the year ahead.
Coming off a better than expected year in 2020, the Client Advisory finds that law firms across all segments of the industry saw strong growth this year. The average revenue growth is expected to be 14.7% over the same period of 2020, easily absorbing expense increases driven heavily by compensation pressure tied to an acute talent war. A delayed return to the office, however, kept anticipated levels of operating expense growth depressed. Looking to 2022, strong demand levels are expected to continue, albeit with some moderation in the growth levels compared to this year. The practice areas where we anticipate the most growth opportunities are in corporate/mergers and acquisitions, litigation and regulatory/investigations/compliance, finance and capital markets, and funds/investment management.
To date, the compensation expense pressure caused by the talent war has resulted in a 14% increase in compensation expenses, and is the primary driver of the 8% total expense growth seen year to date. This pressure was caused by the demand for law firm services outstripping the supply of lawyers, creating the acute talent war. Meanwhile, the delay in returning to the office has led to more moderate growth in operating expenses than anticipated, up just 3% for the first nine months. In 2022, accelerated expense growth is anticipated as firms return to the office in some form and there is a gradual return of travel and business development expenses, as well as rising infrastructure spending.
“We are optimistic about 2022, but there are challenges ahead, including how to successfully implement a hybrid model and win the war for talent. Additionally, as we return to a more normal environment, we are likely to see a moderation in profit growth compared to 2021. We also expect to see the return of dispersion, which will likely fuel further consolidation,” said Gretta Rusanow, Head of Advisory Services for Law Firm Group at Citi Private Bank. “We also expect greater expense pressure in 2022, with the return of increased operating expenses as firms adapt to new working environments. This will make the continued focus on operational efficiency a key priority.”
With the increased distribution of vaccines under the backdrop of the spread of the Delta variant and other mutations, the most immediate challenge or opportunity, is the phased return to office and the need to get it right. Most firms have put in motion plans for at least a partial return during the fourth quarter with three days being the most common hybrid approach. The challenge for management is to focus on building a strong culture whichever hybrid model they choose, while considering the effects of burnout, the increase in wanting a healthy work/life balance, and career aspirations.
“Since we started publishing the Citi Hildebrandt Client Advisory 15 years ago, we have historically taken the position that the law firm industry is a highly successful and stable one,” said Brad Hildebrandt, Chairman of Hildebrandt Consulting. “We saw this continue to play out over the last two years, with law firms demonstrating their ability to adjust to the global pandemic with almost lightning speed, while seeing such strong, record performance.”
This year’s Client Advisory also highlights diversity, equity and inclusion (DEI) efforts among a group of large law firms. The Law Firm Group asked firms to report on gender, race and ethnicity levels in 2017 and 2020 to identify any shifts that have occurred since DEI reporting became more prevalent in the law firm industry. While the study found an increase in racial and gender diversity across large firms, they also noted the key challenge they face is retention of minorities.
Our analyses and projections are based on data collected from a sampling of primarily US-headquartered law firms by Citi Private Bank, as well as conversations with law firm leaders. For third-party providers of legal services, our information is mostly anecdotal. Sources include the “Citi Annual Survey Database” of 213 US-and UK-headquartered firms, including 43 Am Law 1-50 firms, 40 Am Law 51-100 firms, 52 Am Law Second Hundred firms, and 78 additional firms; 173 firms from the “Citi Flash Survey”, including 41 Am Law 1-50 firms, 34 Am Law 51-100 firms, 46 Am Law Second Hundred firms and 52 additional firms; the “Citi Law Firm Leaders Survey” of 56 large firms headquartered in the US, UK, China and India; and the “Law Firm Leaders Confidence Index” which reports the forward-looking opinions of law firm leaders from 129 firms.
The full report can be accessed via the Citi Private Bank website here.
About Citi Private Bank:
Citi Private Bank is dedicated to serving worldly and wealthy individuals and families, providing customized private banking across borders. With over $600 billion in total client business, the franchise serves clients domiciled in over 100 countries through a network of 50 offices in 18 countries. Citi Private Bank helps clients grow and preserve wealth, finance assets, make cash work harder, safeguard assets, preserve legacies, and serve family and family business needs. The firm offers clients products and services covering capital markets, managed investments, portfolio management, trust and estate planning, investment finance, banking and aircraft finance, art advisory and finance, and sports finance.
Citi, the leading global bank, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.
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About Hildebrandt Consulting:
Hildebrandt Consulting is continuing its long and distinguished history as the preeminent global consulting firm in the legal profession. With clients in over 15 countries, Hildebrandt has built up unmatched expertise in every aspect of professional firm management. Our reputation for helping firms arrive at strategic solutions comes from our knowledge of the interdependent elements that contribute to overall business performance.