Market Conditions Have Not Yet Fully Hit Law Firm Balance Sheets
Newtown Square, PA, December 15, 2008 – The large majority of law firms remain sound financially and on a steady footing with their banks according to the newly released Altman Weil Flash Survey on the Law Firm Credit Crunch. The survey of the 700 largest US law firms was conducted in November 2008.
“We expected to see more distress from law firms,” says Altman Weil principal James D. Cotterman. “But it appears that market conditions have not yet fully hit law firm balance sheets. Where we do see some softening, it is more likely to be in large law firms with over 250 lawyers and in major legal markets, defined for the survey as New York, Chicago, Washington DC, San Francisco and Los Angeles.”
Firms Act Preemptively to Strengthen Their Financial Position
The survey asked what internal steps law firms had taken or were considering in response to the recessionary environment. The top five answers were: reduction in operating expenses (81%), deferred capital expenditures (76%), terminating staff (51%), terminating associates (38%) and increasing partner capital (38%).
“Getting law firm partners to part with cash to capitalize their law firms is a daunting task in good times; in bad times it is a nightmare scenario. But those law firms whose owners invest to keep banks as minor players in the capital structure will be in a much better position to weather this storm,” observes Cotterman.
Overall, law firm collections at the end of the third quarter of 2008 were virtually unchanged from the same time period in 2007, with under-90, 91 to 180 and over-180 day aging roughly 60%, 16% and 24% respectively. However, in major markets and among the largest law firms there was a slightly more worrisome picture with 4.2 point decrease in under-90-day AR for major markets and a 2.9 point decrease among the largest law firms.
“Large and major market firms have larger clients who tend to manage money better and are probably hoarding cash if they can. Legal is not as important as the electric bill or key raw material suppliers,” explains Cotterman.
Forty percent of law firms had lower interest rates at the end of September 2008 as compared to third quarter 2007, while only 11% were facing higher rates. Collateral and personal guarantees were either unchanged or not required overall. The large majority of law firms saw no decrease in the availability of adequate credit lines. Nearly a third of major market firms had changed or are considering a change in their lead bank, and 13% had added or are considering adding additional banking relationships.
“Adding banking relationships mitigates against being held hostage to one bank's policies regarding rates, collateral and the like. It is also good to have a backup plan in case a lead bank cuts off or severely limits access to credit,” according to Cotterman.
Outlook for 2009
A quarter of all firms surveyed believe that there will be little or no change in their 2009 revenues compared with 2008; 8% anticipate revenue increases next year, while 66% are expecting lower revenues in 2009. Of the latter group, about half expect a reduction of 1% to 5% and half expect to be down 6% to 10%.
Fifty percent of all respondents indicated that their firms would make minimal or very selective increases in billing rates in 2009, and an additional 4% will make no increases. Fourteen percent of firms plan to adjust rates to the Consumer Price Index only. Thirty-two percent will continue their historical pattern of rate changes. None of the firms surveyed had plans to decrease their billing rates.
The Full Survey
The Altman Weil Flash Survey on the Law Firm Credit Crunch was conducted in November 2008 and polled 708 law firms. Completed surveys were received from 85 participants, a 12% response rate. Twenty four percent of respondents were from firms with 250 or more lawyers; 47% were from firms with 100 to 249 lawyers; and 29% were from firms under 100. The full report appears on the Altman Weil website at www.altmanweil.com/LFCreditCrunch.
About Altman Weil
Founded in 1970, Altman Weil, Inc. is dedicated exclusively to the legal profession. It provides management consulting services to law firms, law departments and legal vendors worldwide. The firm is independently owned by its professional consultants, who have backgrounds in law, industry, finance, marketing, administration and government. More information on Altman Weil can be found at www.altmanweil.com.