Texas law firms see slower growth as out-of-state firms swoop in

The skyline is shown at sunset in Austin
The skyline is shown at sunset in Austin, Texas, U.S., October 25, 2021. Picture taken with a drone. REUTERS/Brian Snyder
  • Wells Fargo survey says revenue increased by 8% for homegrown Texas firms, compared to 14% for U.S. firms overall
  • Expenses rose in 2021 as law firms competed for talent

(Reuters) - Texas-founded law firms saw comparatively smaller revenue growth in 2021 as out-of-state competitors flocked to the Lone Star state, Wells Fargo Private Bank's Legal Specialty Group said Tuesday.

Revenue for Texas firms jumped by 8%, compared to an average 14% growth for U.S. law firms overall last year, Wells Fargo said. California and New York-founded firms outpaced that average, reporting revenue growth of 18% and 16%, respectively.

Law firms flocked to Northern California and Austin in 2021, chasing talent and client work for established and emerging technology companies. Non-Texas firms gained market share by poaching lawyers and clients from homegrown firms, Wells Fargo found.

"I think that’s probably the overwhelming factor" to explain why Texas' growth is not bigger, said Joe Mendola, senior director of sales for Wells Fargo Private Bank Legal Specialty Group, noting that the bank calculates its regional data according to firms' "traditional headquarters," not the revenue generated in a given market.

Regional differences aside, strong client demand made for a lucrative year overall at the country's largest law firms. Law firm revenue jumped by 16% on average among the 50 highest-grossing U.S. law firms as ranked by The American Lawyer, compared to an 11% increase for firms ranked in the next highest 50, Wells Fargo said. Net income was up an average 19%, but up 21% for the 50 highest-grossing firms.

More than 97% of the 130 large and regional law firms surveyed by the bank reported an increase in revenue, Mendola said.

Expenses also increased among surveyed firms, rising by 10% on average last year as many law firms poured cash into attorney compensation, Wells Fargo found. Firms vying for talent showered associates with widespread pay increases and hefty bonus payouts last year, leading some consultants to question whether the pace is sustainable.

But spending was unusually low in 2020 as firms grappled with the onset of the COVID-19 pandemic, Mendola said.

"Discretionary expenses have not returned to pre-pandemic levels," he said.

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David Thomas reports on the business of law, including law firm strategy, hiring, mergers and litigation. He is based out of Chicago. He can be reached at d.thomas@thomsonreuters.com and on Twitter @DaveThomas5150.