Modest average revenue growth this year primarily impacted by drop in demand and longer collection cycle
Firms expected to look closely in 2023 for strategic growth opportunities in line with their expertise
NEW YORK–(BUSINESS WIRE)–Citi Law Firm Group and Hildebrandt Consulting today released their 2023 Citi Hildebrandt Client Advisory, which establishes the broad landscape for the law firm industry, how firms are responding to industry, economic and market challenges, and their potential opportunities for growth in the year ahead. While 2022 proved to be a challenging year for law firms, especially off the back of an unusually strong 2021, we view a comparison to 2019 as more accurate, the law firm industry has performed very well and proven resilient.
This year’s Client Advisory found modest revenue growth at 4.1% average for the industry. That’s compared to 14.7% over the same period of 2021. These results were mostly driven by a 1.2% decrease in demand over the first nine months of this year, and a collection cycle which lengthened by 3.7% as law firm clients take longer to pay bills. Accounts receivables grew 10.4% and with deals on hold waiting for market volatility to settle, firms are also carrying high levels of unbilled time in their nine-month inventory, up 5.8%. Most impacted have been firms focused on M&A and capital markets work.
In 2022, law firms faced the challenge of a drop in demand coupled with increased headcount as a result of rapid hirings in 2021. This year, lawyer headcount grew 4.5%, and equity partner headcount increased 1.2%, leading to leverage growth of 4.3%. While the level of excess capacity may be painful in the near term, experience has shown that this will correct itself when the market inevitably rebounds. And while the talent war seen in 2021 and in the early part of 2022 has settled, we expect to see lateral movement of top talent as firms look for growth opportunities from other firms.
“Coming off the heels of very strong 2021 results, 2022 faced an uphill battle at the outset,” said Gretta Rusanow, Head of Advisory Services, for Citi’s Law Firm Group. “But when we look at average annual profitability growth since 2019, we believe that the law firm industry has had a positive few years. While we can expect continued headwinds from the macro environment into 2023, we are confident law firms can continue to demonstrate their resilience and ability to weather challenges.”
In an expected market downturn next year, firms are optimistic about growth in down cycle practices, including litigation and their bankruptcy and financial restructuring practices. While we have not yet seen the build-up in bankruptcy and financial structuring work anticipated in the second half of 2022, we expect that this will come in 2023. And while firms are more muted about the outlook in general for M&A and capital markets, they expect continued growth in private equity and funds / investment management work. We can also expect to see growth in regulatory, investigations and compliance work, anti-trust and environmental, social and governance (ESG) advisory work. We expect to see an even greater focus on operational efficiencies – a clear trend of the past several years that was accelerated by the pandemic. In a slow-growth, higher cost environment, it will be imperative for firms to pursue a range of both expense- and revenue-related operational efficiency initiatives. These initiatives will enable firms to deliver more efficient legal services, support a more flexible work model, reduce costs and improve revenue and margin growth.
“In both good times and bad, lawyers are always in demand and we expect this to be the case next year as well. Firms must continue to adapt quickly and creatively as they have over the last two years of unprecedented issues to stay competitive.” said Brad Hildebrandt, Chairman of Hildebrandt Consulting.
Our analyses and projections are largely 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 over the period from January to November 2022. Sources include the “Citi Annual Survey Database” of 210 US-and UK-headquartered firms, including 44 Am Law 1-50 firms, 38 Am Law 51-100 firms, 52 Am Law Second Hundred firms, and 76 additional firms; 175 firms from the “Citi Flash Survey”, including 41 Am Law 1-50 firms, 37 Am Law 51-100 firms, 48 Am Law Second Hundred firms and 49 additional firms; the “Citi Law Firm Leaders Survey” of 54 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 132 firms.
This report is for informational purposes only based on those responses from the survey and are not intended to represent investment advice.
The views expressed herein are those of the participants and do not necessarily reflect the views of Citigroup Inc., Citigroup Global Markets Inc., and its affiliates.
The full Client Advisory can be accessed here.
About Citi:
Citi is a preeminent banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in its home market of the United States. Citi does business in nearly 160 countries and jurisdictions, providing corporations, governments, investors, institutions and individuals with a broad range of financial products and services.
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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.
Contacts
Media contact:
Gabriel Morales
gabriel.morales@citi.com
