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Large Texas Firms Lag in Revenue Growth, But Improve Profits Anyway

Texas. Credit: LUMIKK555/Shutterstock.com

Texas. Credit: LUMIKK555/Shutterstock.com

2018 was mostly a good year for Texas-based large law firms—in some cases significantly—as early reports for the Am Law 100 and Am Law 200 indicate a record-setting year not only in Texas but nationally.

Revenue and profits at these firms generally reflected stronger demand than in previous years, although perhaps not to the level of some of the nation's very largest Am Law 100 firms.

But it was not an entirely rosy picture in Texas when looking closely at area firms. While seven of the eight brought in more revenue in 2018 than in 2017, Houston's Baker Botts saw a 7.3% decline in revenue, the result of less contingency-fee revenue than in 2017, according to former managing partner Andrew Baker.

In Texas, revenue per lawyer (RPL) and profits per equity partner (PEP) improved at six of the eight large firms, in some cases by large percentages. The RPL and PEP financial markers were flat at Texas-founded Akin Gump Strauss Hauer & Feld from 2017 to 2018, and dropped at Baker Botts.

Several of the big Texas firms showed double-digit increases in PEP. They were up by 16.8% at Jackson Walker, 15.3% at Thompson & Knight, 11.3% at Bracewell and 10.6% at Locke Lord.

Bracewell's increase in PEP came even as the number of equity partners at the firm increased by 2.9%. The number of equity partners declined by 1.9% at Jackson Walker, by 11.3% at Thompson & Knight, and by 2.9% at Locke Lord, reductions that would serve to boost PEP.

The financials from Texas firms are in line with an earlier assessment of 2018 by Citi Private Bank's Law Firm Group, which found that while the legal industry as a whole posted its best results in a decade in 2018, results in Texas were underwhelming.

In the Lone Star State, revenue growth lagged, due to slower overall demand growth, but increases in net income and profits per equity partner were nevertheless strong, according to the Citi report.

Right-sizing



John Wilmouth, senior client adviser in Citi Private Bank's Law Firm Group, said the financials of the eight Am Law firms, while not the exact same group of firms as in the Citi sample, suggest similar results. He said the Citi assessment shows that Texas firms enjoyed strong PEP growth, driven in large part by "right-sizing" and the fact the firms were busy across many practice groups.

Of the eight Texas firms in the mix, only three had more lawyers in 2018 than in 2017—Vinson & Elkins, Akin Gump and Thompson & Knight.

Wilmouth said the increase in PEP at many Texas firms was related to declines in the number of equity partners, but also resulted from billing rate increases in Texas, which were greater than the national average. Texas firms raised billing rates by 4.8 percent in 2018 on average, beating the national average of 4.3 percent, Citi found.

Hiring in Texas, where the lateral market was very active in 2018, may reflect a shift toward practices where lawyers can bill at higher rates, Wilmouth added. He said that positively affects PEP and RPL.

Wilmouth said while some of the largest law firms have been doing quite well year after year, some small firms are also thriving.

"Firms don't have to be large to do well. It seems as though the firms really focusing on what they do best—and in some cases that requires them shrinking a little bit—they may actually position themselves to be more profitable for the years ahead," he said.

Will Growth Beget Growth?



Texas was a very hot market for mergers in 2018, with three large Texas firms combining with out-of-state firms—Andrews Kurth Kenyon merged with Virginia firm Hunton & Williams; Strasburger & Price merged with Clark Hill of Detroit; and Gardere Wynne Sewell merged with Foley & Lardner, a Milwaukee firm.

A question is whether the largely positive financials posted by Texas firms, including many in this group, will lead to more Texas merger activity. Robert Croyle, a director in Houston in the partner practice group at Major, Lindsey & Africa, said financials are really just "one leading factor" that causes firms to proactively market themselves as a merger candidate.

He said firms tend to follow their strategic plans, which guide firm leaders on where to go over the next few years, and that potential mergers have to be harmonious with those blueprints.

As for laterals, Croyle said lawyers joining new firms largely make decisions based on how a move would benefit their clients. A firm's financial performance in a given year is a factor, but a less important one, he said.

The more important question, he said, is "How is the move going to benefit the individual lateral's overall practice?"

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