Texas-based corporate law firms are billing more hours, growing revenues faster and collecting money from clients better and faster in 2023 than their counterparts throughout the U.S., according to new data from Citi Private Bank’s Law Firm Group.
Demand by business clients for legal work in Texas is also up, and leaders at Texas law firms are “slightly more optimistic” about growth for the rest of 2023 and 2024 than corporate lawyers in other regions of the country.
Revenue was up 11 percent for law firms headquartered in Texas during the first six months of 2023 — compared for only four percent for the legal industry nationally, said Michael McKenney, managing director of Citi’s law firm team.
“We think our Texas firms are well-positioned to gain share both through a first-mover advantage and through a profile of practices and clients that is likely to rebound ahead of the broader market,” McKenney told nearly 100 law firm leaders and corporate general counsel in a recent Texas Lawbook webcast.
Total billable hours by Texas firms — also known as “demand” — is up slightly year over year, while demand is down nearly one percent for law firms in general, according to the Citi data.
“The one region that is outperforming Texas at the moment is Washington, D.C. And it is being very much buoyed by antitrust regulatory compliance, white collar investigations — all of which many of the firms on this call have had a hand in as well,” McKenney said.
Citi’s data shows that Texas-based firms increased their hourly rates in 2023 by 7.3 percent, compared to 7.7 percent for lawyers across the U.S.
The fact that demand is up only slightly but revenue increased 11 percent “tells you a bit about the pricing power that we’re seeing,” McKenney said. “It’s an industry average that’s being very much driven by bill rates.”
“Our Texas firms have another advantage, and that is with respect to their collection cycle — the ability to take a dollar logged all the way through to cash collected.” McKenney said. “That collection cycle has shortened by 4.7 percent. Firms are getting to cash faster. That is very much out of line with what we see happening in the broader industry.”
He said much of the credit for the accelerated collection cycle goes “to our finance teams and our finance professionals who are helping to drive that outcome.”
The Citi data shows that lawyer head count at Texas firms was up 2.2 percent during the first half of 2023, versus 3.2 percent for the legal industry nationwide.
Partner head count among Texas-based firms was up 2.5 percent, which is more than triple the national average of 0.7 percent.
“Our Texas firms being careful around headcount,” McKenney said, but “we do see a willingness to expand the equity partnership in our equity partner headcount.”
Expenses at Texas law firms was up only four percent, which is the lowest of the nation’s 11 regions, according to Citi data.
“Texas firms are flexing their cost structures very effectively to protect earnings,” McKenney said.
Another advantage Texas law firms are experiencing in 2023 is a “stronger inventory position.”
Inventory — hours worked but unpaid — is up 5.8 percent at Texas firms, which is well below the industry national average of 8.9 percent.
“I would argue that in this particular case that is good, and the reason I’m saying that is because part of the reason that our inventory has increased less is the acceleration in the collection cycle,” he said. “I would much rather be going into the second half of the year … with more of my inventory already collected as cash than to be carrying it in dependent on a fourth quarter collection drive.”
“It’s also the work that has been invoiced but has not yet been collected as cash,” McKenney said. “Both components are aging. The aging on the unbilled time. We are watching very carefully because some portion of it is hung deals that may eventually have to be written off. The aging on the accounts receivable side is clients are paying their invoices more slowly and we are gathering stories of clients that maybe in the past were paying on 60 days. Now informing their firms that they’re going to pay at 75 or they’re going to pay it 90 days.”
McKenney said these notices “are coming across as sort of unilateral pronouncements.”
“We think part of what’s driving that behavior is the corporations are getting a higher return on their cash this year than they have over the last two years,” he said. “And so they are instead leaning on their law firms as a source of funding and slow paying those invoices.”
McKenney said Citi’s Leaders Confidence Index, which measures the outlook of law firm leaders for the second half of 2023, shows “sentiment is slightly more optimistic” though “the fate of the U.S. economy and global economies remains a concern.”
“Law firm leaders are in general more positive about the outlook for demand as we go into the second half,” he said. “There’s also an expectation of improved revenue, but in the face of greater concern about realization.”
McKenney returned to the subject of inventory and realization.
“In general, the client reception to these accelerated build rates has been positive,” he said. “The concern around realization is there is a component in our inventory, particularly for top-of-market transactional firms that usually distinguish themselves with respect to being key players in corporate M&A and capital markets.”
“Some of those firms are carrying aged inventory in the unbilled time category, essentially representing hung deals from the first half of 2022,” he said. “By the time we get to the fourth quarter of 2023, some of that inventory will have been aged for a year and a half or two years without an invoice going out the door. In our experience, when that happens you start to question whether that work is ever going to convert to cash. And the outlook for an increase in write-off activity is very much top of mind for us here at the Law Firm Group.”
Last month, The Texas Lawbook reported exclusively that hourly rates charged by a handful of lawyers at large corporate law firms has surpassed $2,000 an hour. In a separate article, The Lawbook reported that energy companies have paid their outside counsel nearly $300 million in the Winter Storm Uri-related litigation.