Revenue figures for the last quarter slowed among the top firms in the country – but perhaps more worryingly, demand for legal services actually dropped, albeit, only by 0.1 per cent, compared to the comparable quarter last year.

Trimming expenses

The researchers – a group from Citi Private Bank’s law firm group – pointed out that while law firms managed to trim expenses during the third quarter, expenditure was still greater than revenue. ‘In fact,’ says the research team writing on the AmLaw Daily web site, ‘the gap between the two widened, putting a further squeeze on profit margins.’
The Citi Bank team also pointed a finger at a ‘slowdown in the collection cycle’ of fees as damaging law firm finances. But they also offer an explanation. ‘While the second quarter of 2012 benefited from the conversion to cash of inventory—work that has been performed but not yet collected on—that was built up during the first quarter, there wasn’t enough of an inventory build-up in the second quarter to benefit third-quarter collections.’
 

Inventory build-up

Indeed, the researchers claim that finance directors at the US’s top firms needn’t head for window ledges just yet. They maintain there was ‘a build up in third-quarter inventory, so we might see a rebound in revenue growth in the fourth quarter’.
Nonetheless, the Citi team warns that ‘this seesaw pattern of inventory growth and collections … particularly on top of increasingly weak demand, does not bode well for consistency in the foreseeable future’.