Citibank’s third quarter report on law firm profitability for 2011 was just issued and while artfully couched in cautious euphemistic terms, there is much in Citi’s reports which should give law firm leaders much to be concerned about. Is it time to don sackcloth and ash? No, but it is certainly time to go to DefCon IV.
While Citi reports that collections for Q3 were strong, expenses are continuing to rise at a faster rate than law firm earnings. Equally disturbing is that corporate demand for legal services continues to decline for the third consecutive quarter and WIP similarly continues to decline. And service partners and counsel are working fewer hours, because there is simply less demand for work. Leverage is declining and the pyramid system only survives insofar as the pyramid has turned completely upside down.
What this tells us is that there is a whole in the bucket and as firms fill their bucket at the trough, more water is escaping than entering. You don’t need to be farmer to know that this is not a very good state of affairs.
Some firms are trying to fill their buckets by actively hiring laterals, which on close analysis does not provide much of a fix, since laterals come at substantial cost.
In short, the news from Citibank is, once again, there’s more tunnel at the end of the tunnel.
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