Law Review: Many law firms seeing an uneven future, with lots of ups and downs

Like the rest of this so-called economic recovery, the rebound in the legal market is starting to feel like a grim slog.

After signs of a rebound in late 2010 and last year, the reality for many law firms is that the pace of business expansion has slowed, maybe even stopped. Meanwhile, perhaps because of the presidential election, uncertainty has grown.

Two new surveys by legal consultants at Wells Fargo Bank and the Hildebrandt Institute show how hard the comeback trail has been on some firms. On their face, the numbers aren't cause for law-firm leaders to weep bitter tears. Indeed, the Wells Fargo survey of 115 law firms nationwide, including firms in Pennsylvania, shows revenue for the first six months of the year is up 3 percent from the same period in 2011.

But dig down a bit and you find that business, after recovering last year, is actually off. Billable hours overall are down, even as costs go up.

In the Philadelphia region, according to the Wells Fargo survey, net income at firms is down 8 percent. These surveys should dash any thought that the halcyon days of 2006 and 2007 are immediately in the offing.

Jeffrey Grossman, national managing director of the bank's legal-specialty group, said the top line number went up, even though billable hours went down, because firms still were collecting 2011 receivables and in some cases had been able to raise rates. They're bridging the gap for now with short-term borrowing, which is up 14 percent over 2011.

"There is an oversupply in the industry in terms of lawyers," Grossman said.

Hildebrandt, which tracks legal business trends, came to a similar conclusion in a survey released earlier this month.

It found that demand for legal services writ large had dropped off, and that the hardest hit practice was litigation, a mainstay for many firms. Interestingly, smaller firms saw increasing demand, lending support to the idea, fashionable as the legal market was imploding in 2008 and 2009, that corporate clients would seek out smaller firms with lower rates.

What Hildebrandt and Wells Fargo found in their surveys is what law firms in Philadelphia are experiencing everyday. At Ballard Spahr, business is up this year over last, said Mark Stewart, firm chairman. But competition among firms has sharpened intensely.

Moreover, Stewart says, clients are resisting rate increases and asking more and more for alternative-billing arrangements in place of being charged by the hour. That often means less money per engagement.

Scott Green, the non-lawyer CEO of Pepper Hamilton L.L.C., said the firm has benefited from a lively pace of deal-making by its clients. But the outlook for the rest of the year is murky.

"The pipeline does look a little tender, and while we are hopeful, there is a lot of uncertainty out there," he said.

One practice area that remains robust, according to Hildebrandt, is labor and employment. As downsizing companies look for ways to minimize legal exposure to disaffected employees, labor and employment lawyers are doing a brisk business.

Plaintiffs firms are doing well in that space too, as workers seek to litigate everything from compensation to layoffs. But this is like a boom in business for funeral directors in the midst of a pandemic: Great for that one business, but a grim sign for everyone else.

The Census Bureau reported Wednesday that household income in the U.S. fell in 2011 for the fourth straight year to an inflation adjusted $50,054 - the lowest it has been since 1995. The employment numbers for August, released on the day after the Democratic National Convention, showed a net gain - but at a level below what is needed to keep pace with population growth.

Yet, the unemployment rate has slightly decreased, exports from the ports of Philadelphia and Wilmington are up sharply and the housing market is showing signs of life both regionally and across the country. The sum of these contradictory indicators is that a somewhat squishy floor seems to have formed, and that the trend is upward, but so slightly it is hardly noticeable.

No one expects the legal industry to go off a cliff, as seemed briefly possible following the Lehman Brothers Holdings Inc. collapse in 2008. But the impression is beginning to dawn that progress, if it occurs at all, will be incremental and that the glory days of pushing through rate hikes year after year with little resistance from clients is now ancient history.