Law Firm Performance in 2012: ‘Not Stellar,’ Outlook ‘Grim’

Here's some happy news to start of your week- according to the Wall Street Journal's Legal Blog- things arent looking for rosy for law firms this year.  Jennifer Smith writes,
Wells Fargo WFC -0.65%’s law firm lending group, which surveyed 115 firms in July on their performance in the first six months of 2012

“The results were not stellar,” Jeff Grossman, National Managing Director for Wells Fargo’s Legal Specialty Group, said on Friday. “We think the second half of the year is going to be softer than the first half….You tend to see transaction work slow down during an election year.”

In general, between January and June of this year law firms’ costs outpaced their revenue growth. Overall revenues were up about 3% while general expenses (money spent to hire more lawyers and stuff, buy new computer systems, etc.) grew by about 6.5%.

Here’s the good news: if you’re one of the highly profitable firms that has been raking it in despite the down economy, expect more of same.

The firms that do the choicest deals and transactional work — those with profits per partner of $2 million or more — are pulling ahead of the pack, Mr. Grossman said. Those firms, many based in New York,  saw net income increase almost 1% compared to the first six months of 2011. That’s in large part because they were able to control expenses, he said.

Not doing so well:  most other  folks, who are either treading water or seeing their profits drop amid tepid demand for legal services.

“Because the market is very soft, the firms below the $2 million profits per partner mark got hit hard in terms of revenue,” Mr. Grossman said.

Partners may need to step it up. While productivity rose among associates, partners increased their total hours worked by less than 1% among the firms surveyed, a mix of AmLaw 100/200 firms and regional players.

“It is a grim outlook,” Mr. Grossman said. “But I don’t think we can forecast that a lot of industry players will fall by the wayside.”

That’s because firms are busy sandbagging against future hard times by amassing capital — perhaps chastened by the mammoth failure of New York firm Dewey & LeBoeuf LLP earlier this year.

This summer Miami’s Greenberg Traurig LLP took some heat when it issued a capital call for the first time in a decade. The firm called the call “a prudent move to create a further equity cushion” at the time and said it was not prompted by any financial distress.

Mr. Grossman said lots of firms are raising capital — and some do it every year.  “More than half the firms in the AmLaw 100,” he said. “More and more firms, in order to track laterals they want to tell partners that they have a very strong balance sheet.”