Law Firm Revenue Growth: Warning Signs for a Potential Crisis

 
There have been a lot of discussions lately about law firm revenue growth. Most firms are seeing some level of growth, but there are warning signs that this may not be sustainable. In this article, we'll take a look at the role of billings and collections in false revenue growth, and what law firms can do to avoid a potential crisis. 

To see which global firms dominate today’s revenue race, read The World’s Largest Law Firms by Revenue 2025 before diving into potential risks ahead.

 

Understanding False Revenue Growth in Law Firms

For managers and administrators, false revenue growth in law firms has become a pressing issue. As it is increasingly difficult to measure true law firm profitability, false revenue profits can skew yearly averages and mask potential problems from the surface. To define false revenue growth, it is essential to understand how law firms measure profit. Most law firms track average annual law firm profitability through billing and collections. Billing quantifies the financial performance of legal services over a certain period, while collections measure how many billed fees were collected within a particular time frame. When law firms use these metrics to calculate average annual law firm profitability or project future earnings, they are relying on false revenue growth when billing results need to be properly reconciled with collections data. This unsustainable practice can lead to troubling outcomes like understaffing, low morale, and misallocation of funds - none of which benefit law firms in terms of long-term business purposes and business profitability. To fully grasp how false revenue growth arises, it helps to revisit the fundamentals in our Guide to basic law firm economics and the billable hour, which lays out how billables ultimately drive firm revenues.
 

The Role of Billings and Collections in False Revenue Growth

In the legal industry, billings and collections’ role can significantly affect false revenue growth. Companies tend to raise costs, increase work costs, charge higher rates, and pressure clients to pay faster to inflate their total revenue figures. Unfortunately, costs associated with such actions tend to outweigh the gains obtained from increased payments in cash or credit. Higher costs lead to increased costs of goods sold, which leads to reduced average annual profitability growth. This undermines the overall demand for legal services due to reduced capital inflows or investments from clients or investors expecting returns on their investments. Understanding how billings and collections impact false revenue growth is one crucial insight that firms must understand if they hope to continue to compete effectively in the competitive legal industry. Challenges in inflating revenue and managing costs also influence compensation dynamics—see how we analyze the link between firm profitability and attorney compensation to understand that connection. Labor costs are a major factor in revenue sustainability — for insight into hiring and lateral pressures, see our 2025 law firm recruitment trends piece.

To ensure a successful law firm, it is important to analyze the trends of total billable hours and legal staff over time. By comparing the two data sets, we can identify if the growth rate for total billable hours is higher than that of total legal staff. This outcome would lead to increased average utilization rates. If this trend is reversed, then the average utilization will decrease. Additionally, it is important to track the percentage of partners who bill below certain hours and ensure this peak is not within the first two bands (under 1,400 or 1,401-1,500 hours). If so, firms should honestly assess each partner’s contributions over the past two to three years. Ignoring this vital information can be done when the firm’s economic climate is strong, but it should not be evaded in times of crisis. Finally, if a partner’s contributions do not meet expectations, they may benefit from finding another law firm during good times rather than bad. If false revenue growth remains unchecked, it can distort the real returns of partnership — a deeper dive is available in our partnership ROI analysis and law firm economics article.
 

How To Identify Warning Signs of a Potential Crisis

Law firm leaders must be vigilant about potential warning signs of a financial crisis so that they can take preventative measures in advance. The first nine months of the law firm’s fiscal year are incredibly important as they provide law firms with guidance on risk levels and assess whether staffing, practice area focus, and cost have been affected. Ultimately, law firms have a legal and moral responsibility to their clients to ensure their businesses continue to run smoothly and profitably. As firms push for higher profitability, understanding why profits per partner keep increasing offers important context for how revenue growth is being monetized.

To monitor a law firm’s overall health, the following should be closely reviewed:

• Analyzing high-volume accounts;
• Measuring matter profitability;
• Understanding their law firms’ mix of litigated and transactional matters;
• Assessing practicing law interests regarding pay rates versus certain types of practices;
• Comparing existing costs against income from former years;
• Assigning responsibilities for risk management across departments including finance, operations, and IT;
• Rate possible penalties for engaging in normal business activities such as settlements or investments.

Using these critical steps, law firm leaders can easily identify warning signs before an issue emerges that could affect the long-term success of the law firm. To situate revenue risks in broader context, refer to our state of the legal market in 2025 analysis, which outlines macro headwinds facing law firms today.
 

Assessing the Impact of Low Billing Rates on Firm Survival

Many firms in danger of failure have difficulty raising their billing rates. This is more reflective of the services they offer and how much these services are worth in the marketplace than it does with their actual billing practices. In a difficult economy, it can become even harder for a firm to raise its billing rates if this has already been met with significant resistance. As a result, they need to keep up with inflation and lose ground compared to the wider market. To get an accurate picture of how this affects them, it helps to look at their average attorney billing rates over the past five years and relevant data from the Consumer Price Index (CPI). Tracking these figures and comparing them to conservative estimates of the market growth rate makes it easy to spot any discrepancies that can then be addressed. If their rates are below both lines, they may need to consider a different focus or new service delivery means to secure their future. Firms under pressure often respond with cost cuts and rate strategies — see how some are adjusting in strategic adjustments by law firms amid economic stress.

Many businesses that will ultimately experience a financial crisis have seen a recent surge in transforming inventory (accounts receivable and work in progress) into cash. Revenue can increase without an upsurge in production due to the mechanics of modified cash basis accounting used by most law firms for bookkeeping. Revenue is recognized when money is received instead of when services are rendered. If production slows down, this process can lead to an accumulation of inventories that need to be billed or collected in the future. Firms accelerate their billing/collections cycle to avoid this situation and compensate for the lack of production. Although this is an acceptable practice from time to time, it should be monitored closely, as a recurring focus on this process may indicate an underlying problem with diminishing workloads. To estimate the effect of billings/collections activities, calculate the “months of fees” equivalent for inventories by summing the accounts receivable and work-in-progress inventories at year-end and dividing the sum by one month’s worth of revenue. A decline of 0.4-0.6 months is significant, and further decreases may indicate that the firm has a larger issue to address.

• To guard against distorted incentives arising from false growth, firms should explore fair and competitive compensation strategies that tie pay to sustainable value rather than inflated revenue.

 

Steps to Mitigate the Negative Impact of False Revenue Growth in Law Firms

False revenue growth negatively impacts every business process and financial goal for any size of law firm. Process improvement, focusing on profitability metrics, should be implemented to measure actual profit properly to mitigate these effects. This process can be time-consuming and requires knowledge of the partner’s profit efforts to accurately compare the first three quarters to the same period in previous years, such as repeat engagements and resources used per partner. When done correctly, reports can then be delivered that demonstrate accurate compliance with each partner’s goals while evaluating cost savings associated with process improvement. By taking these steps, firms can accurately gauge their overall financial performance and agility as they move forward with desired objectives.

The following steps can be taken to reduce the negative effects of false revenue growth in law firms:

1. Review revenue growth metrics and identify areas of false revenue growth.
2. Compare current revenue growth to the same period in previous years.
3. Develop an action plan for improving profitability metrics.
4. Investigate new process improvement initiatives that can increase efficiency.
5. Identify tasks that are unprofitable or wasteful and eliminate those processes.
6. Track and compare resources used per partner to ensure accurate results.
7. Evaluate the cost savings associated with process improvement initiatives.
8. Create a dashboard monitoring progress towards goals for each partner.
9. Establish accountability for all partners to adhere to financial objectives.
10. Monitor overall financial performance and adjust accordingly as needed.

Misaligned compensation can accelerate a revenue crisis — see the critical role of compensation structures in law firms for how pay models affect retention and performance.

Conclusion

False revenue growth can have devastating consequences for law firms in the short and long term. By understanding the role of billings and collections in false revenue growth and identifying warning signs of a potential crisis, firms can take steps to mitigate the effects of false revenue growth. While some degree of false revenue growth is inevitable in any business, by taking proactive measures to identify and address it, law firms can avoid many negative consequences.


About Harrison Barnes

No legal recruiter in the United States has placed more attorneys at top law firms across every practice area than Harrison Barnes. His unmatched expertise, industry connections, and proven placement strategies have made him the most influential legal career advisor for attorneys seeking success in Big Law, elite boutiques, mid-sized firms, small firms, firms in the largest and smallest markets, and in over 350 separate practice areas.

A Reach Unlike Any Other Legal Recruiter

Most legal recruiters focus only on placing attorneys in large markets or specific practice areas, but Harrison places attorneys at all levels, in all practice areas, and in all locations-from the most prestigious firms in New York, Los Angeles, and Washington, D.C., to small and mid-sized firms in rural markets. Every week, he successfully places attorneys not only in high-demand practice areas like corporate and litigation but also in niche and less commonly recruited areas such as:

• Immigration Law
• Workers Compensation
• Insurance
• Family Law
• Trust and Estate
• Municipal law
• And many more...

This breadth of placements is unheard of in the legal recruiting industry and is a testament to his extraordinary ability to connect attorneys with the right firms, regardless of market size or practice area.

Proven Success at All Levels

With over 25 years of experience, Harrison has successfully placed attorneys at over 1,000 law firms, including:

• Top Am Law 100 firms such including Sullivan and Cromwell, and almost every AmLaw 100 and AmLaw 200 law firm.
• Elite boutique firms with specialized practices
• Mid-sized firms looking to expand their practice areas
• Growing firms in small and rural markets

He has also placed hundreds of law firm partners and has worked on firm and practice area mergers, helping law firms strategically grow their teams.

Unmatched Commitment to Attorney Success - The Story of BCG Attorney Search

Harrison Barnes is not just the most effective legal recruiter in the country, he is also the founder of BCG Attorney Search, a recruiting powerhouse that has helped thousands of attorneys transform their careers. His vision for BCG goes beyond just job placement; it is built on a mission to provide attorneys with opportunities they would never have access to otherwise. Unlike traditional recruiting firms, BCG Attorney Search operates as a career partner, not just a placement service. The firm's unparalleled resources, including a team of over 150 employees, enable it to offer customized job searches, direct outreach to firms, and market intelligence that no other legal recruiting service provides. Attorneys working with Harrison and BCG gain access to hidden opportunities, real-time insights on firm hiring trends, and guidance from a team that truly understands the legal market. You can read more about how BCG Attorney Search revolutionizes legal recruiting here: The Story of BCG Attorney Search and What We Do for You.

The Most Trusted Career Advisor for Attorneys

Harrison's legal career insights are the most widely followed in the profession.

• His articles on BCG Search alone are read by over 150,000 attorneys per month, making his guidance the most sought-after in the legal field. Read his latest insights here.
• He has conducted hundreds of hours of career development webinars, available here: Harrison Barnes Webinar Replays.
• His placement success is unmatched-see examples here: Harrison Barnes' Attorney Placements.
• He has created numerous comprehensive career development courses, including BigLaw Breakthrough, designed to help attorneys land positions at elite law firms.

Submit Your Resume to Work with Harrison Barnes

If you are serious about advancing your legal career and want access to the most sought-after law firm opportunities, Harrison Barnes is the most powerful recruiter to have on your side.

Submit your resume today to start working with him: Submit Resume Here

With an unmatched track record of success, a vast team of over 150 dedicated employees, and a reach into every market and practice area, Harrison Barnes is the recruiter who makes career transformations happen and has the talent and resources behind him to make this happen.

A Relentless Commitment to Attorney Success

Unlike most recruiters who work with only a narrow subset of attorneys, Harrison Barnes works with lawyers at all stages of their careers, from junior associates to senior partners, in every practice area imaginable. His placements are not limited to only those with "elite" credentials-he has helped thousands of attorneys, including those who thought it was impossible to move firms, find their next great opportunity.

Harrison's work is backed by a team of over 150 professionals who work around the clock to uncover hidden job opportunities at law firms across the country. His team:

• Finds and creates job openings that aren't publicly listed, giving attorneys access to exclusive opportunities.
• Works closely with candidates to ensure their resumes and applications stand out.
• Provides ongoing guidance and career coaching to help attorneys navigate interviews, negotiations, and transitions successfully.

This level of dedicated support is unmatched in the legal recruiting industry.

A Legal Recruiter Who Changes Lives

Harrison believes that every attorney-no matter their background, law school, or previous experience-has the potential to find success in the right law firm environment. Many attorneys come to him feeling stuck in their careers, underpaid, or unsure of their next steps. Through his unique ability to identify the right opportunities, he helps attorneys transform their careers in ways they never thought possible.

He has worked with:

• Attorneys making below-market salaries who went on to double or triple their earnings at new firms.
• Senior attorneys who believed they were "too experienced" to make a move and found better roles with firms eager for their expertise.
• Attorneys in small or remote markets who assumed they had no options-only to be placed at strong firms they never knew existed.
• Partners looking for a better platform or more autonomy who successfully transitioned to firms where they could grow their practice.

For attorneys who think their options are limited, Harrison Barnes has proven time and time again that opportunities exist-often in places they never expected.

Submit Your Resume Today - Start Your Career Transformation

If you want to explore new career opportunities, Harrison Barnes and BCG Attorney Search are your best resources. Whether you are looking for a BigLaw position, a boutique firm, or a move to a better work environment, Harrison's expertise will help you take control of your future.

Submit Your Resume Here to get started with Harrison Barnes today.

Harrison's reach, experience, and proven results make him the best legal recruiter in the industry. Don't settle for an average recruiter-work with the one who has changed the careers of thousands of attorneys and can do the same for you.

About BCG Attorney Search

BCG Attorney Search matches attorneys and law firms with unparalleled expertise and drive, while achieving results. Known globally for its success in locating and placing attorneys in law firms of all sizes, BCG Attorney Search has placed thousands of attorneys in law firms in thousands of different law firms around the country. Unlike other legal placement firms, BCG Attorney Search brings massive resources of over 150 employees to its placement efforts locating positions and opportunities its competitors simply cannot. Every legal recruiter at BCG Attorney Search is a former successful attorney who attended a top law school, worked in top law firms and brought massive drive and commitment to their work. BCG Attorney Search legal recruiters take your legal career seriously and understand attorneys. For more information, please visit www.BCGSearch.com.