Texas-based corporate law firms started 2025 strong, but they face multiple headwinds over the next several months.
The largest law firms headquartered in Texas achieved 35 percent revenue increases during the first quarter of 2025 — triple the amount of their national competitors — even though legal demand grew less than one percent during the period, according to the nation’s leading legal industry financial analyst.
Citi Global Wealth at Work Law Firm Group Managing Director Michael McKenney said Texas ranked first in revenue performance among its 11 regions during the first three months of this year on Texas firms’ “ability to monetize their contingent portfolio and collect on that work from prior periods.”
“We saw strong activity in litigation, our regulatory practices, advisory, bankruptcy and restructuring,” McKenney, a former CIA analyst, told The Texas Lawbook in a webcast last week. “We had expectations for a return of M&A and capital markets activity, but that did not happen due to volatility and uncertainty around determining valuations.”
“We are seeing, particularly among strategic investors and financial sponsors, a tendency to hold pending greater certainty around valuations, and this is really what is characterizing the environment that we’ve moved into at the start of the second quarter,” McKenney said.
Part of the Q1 revenue jump can be attributed to hourly rate increases. Texas firms increased rates by 8.5 percent this year, but that is less than the 9.2 percent national average, Citi reports. Only firms based in Chicago, New York, Southern California and Washington, D.C., increased rates more.
“I want to make the point that it’s not only bill rate gains that are driving the strong revenue performance,” McKenney said. “But it is also careful management of the cash conversion cycle, and it is the performance of our clients with respect to invoiced work, which is also driving results. Even though our demand was in positive territory, our cash collection cycle lengthened by less than one percent.”
“There’s a caution that comes through from this, and that is that some of the unbilled time appears to be tied to deals currently on hold, creating questions about the collectability of this work if the macro environment does not change and if that work does not move it through to invoicing,” he said.
Inventory for the first quarter rose 19 percent, compared to nearly 12 percent for the national average, Citi reports.
Texas firms witnessed a 4.2 percent growth in lawyer headcount, which ranked second only to New York.
At 3.8 percent, Texas firms even outpaced their New York competitors in increased equity partner headcount.
“I think part of what may be happening here is our Texas-based firms are very aware of the role being played by market entrants, and they are working to identify, protect and recognize their very best talent,” McKenney said. “The defensive component is to identify your best talent, and you may, in fact, make the decision to promote them a year or two earlier than you would have because you’re trying to immunize those individuals from that recruitment pitch.”
McKenney said he has “a fairly optimistic outlook for the rest of 2025.”
“As we look into second quarter and second half, I would just call out that our inventory coming out of first quarter is up about 19.3 percent again … suggesting that we are set up for a strong first half finish and strength as we move into the second half of 2025,” he said.
McKenney said Texas firms improving realization has been critical to profits.
“We’ve seen conviction around maintaining the pricing strategy and conviction around harvesting inventory, but that strategy of harvesting inventory is at best a short-term strategy,” he said. “Demand gains are going to be critical to the second-half 2025 performance. It’s those lingering old bills. It’s that lingering old work in the unbilled time category that takes so long to get invoiced — that is where we see pressure to write down, which erodes realization, or pressure for additional discounting, also eroding realization.”
“Those firms that are aligned with strategic deal makers — that are aligned to funds, financial sponsors, or that remain the destination for complex litigation — those are the firms that are going to have the advantage in this challenging environment,” McKenney said.