Revenue growth at law firms in Texas lagged the industry during the first nine months of this year, leaving year-end performance to rest heavily on how well the homegrown firms do at collections by the end of December.

“The theme is that relative performance for our Texas firms for 2024 is really going to depend on fourth-quarter collection success, because of… expansion in the collection cycle,” said Mike McKenney, a senior specialist on the Law Firm Group Advisory Team, Citi Global Wealth at Work.

According to a nine-month report from the Citi Global Wealth at Work Law Firm Group, revenue improved by 2.1% for firms in the Texas region compared to the same period in 2023, but revenue growth for the industry was 11.9%. Demand is up by 2% for the Texas firms, compared with 3.2% for the industry, putting the region in 6th place on that marker among the 11 regions Citi examines.

McKenney said demand has been rising faster in the broader market than in Texas. But, he said, the Texas region finished 2023 with demand up 1.7%, which was the top performance among the regions, and the statistics are compared to prior-year periods.

Nevertheless, the Texas region was ranked 11-of-11 regions for revenue growth during the first three quarters of the year.

The Texas region includes eight Texas firms, with the majority in the Am Law 100. The full Citi report includes data from 188 firms, and the Q3 Flash Survey Report found that the industry is on track for strong results, with demand and revenue posting growth from midyear.

McKenney said inventory growth for the firms in the Texas region came in at 12.3% over the nine months, ranked as fourth of the 11 regions, and accounts receivable grew by 14.9%.

“I view that as a very optimistic signal, because the invoices are out, they are in the clients’ hands, the challenges are to collect on the invoice work. We can see a path to improved revenue performance, even though we finished at the nine months at 11 of 11 [regions.] Texas firms don’t need to finish the year at 11-of-11,” he said.

Texas firms continue to do a good job at managing expenses, McKenney said, coming in at fourth among the 11 regions. Expenses for the group of Texas firms rose by 5.6%, compared with 7.5% for the industry.

“I’ve always characterized the Texas firms as having tight controls over the expense line. That is holding again,” he said.

The Texas firms are disciplined around revenue volatility, McKenney said, by adjusting the expense side of the income statement. The expense number for the Texas region during the nine months breaks down to an 8.6% increase in compensation and a 3.6% increase in operating expenses. The increased compensation cost relates to the region’s head count growth of 3%, which compares with 1.3% growth for the industry on average, McKenney said.

Productivity was down slightly in Texas during the nine-month period, coming in 10th among the 11 regions, but McKenney said part of that was due to the 3% head count increase.

He said Texas firms, by increasing head count, are looking to the future, and macro data suggests it will be an improving demand environment.

“They think they have the right practice mix. They like what they see happening as far as interest rate cuts,” he said.