By Nate Raymond

Nov 15 (Reuters) - In a setback for the struggling legal industry, about 15 percent of U.S. law firms said they were planning to reduce partnership ranks in the first quarter of 2013 in a move seeking to address the problem of underused partners, according to a new survey by Wells Fargo Private Bank.

The survey, which looks at the finances of 115 law firms, is one of the quarterly surveys by banks that work closely with law firms and compares data on a year-to-year basis.

For the third quarter of 2012, Wells Fargo found that firms posted modest revenue gains and moved to rein in expenses, but their growth was strained by partners who are not billing enough hours.

Now some firms are planning to shrink partnership pools through reductions and planned attrition, the survey said.

Jeff Grossman, national managing director for Wells Fargo's legal specialty group, stressed in an interview on Wednesday that the issue of underutilized partners is "one of the biggest challenges the industry is facing."

If law firms take the step of reducing partnership ranks by 15 percent in 2013, it will not be the first time or the steepest cuts. At the height of the recession in 2009, according to a survey released a year later by Altman Weil Inc, 25 percent of the law firms surveyed cut equity partners, while 26 percent reduced their non-equity ranks.

Grossman said the share of law firms expected to cut partners is, however, higher than the 5 percent more typically reflected in the survey.

The trend of underused partners was bolstered during the recession, he said, when many firms "de-equitized" partners in an effort to stabilize profits. That helped the bottom line but also produced a rise in underused partners.

Equity partner headcount among surveyed firms is up 1.2 percent this quarter, compared to 4 percent for non-equity partners, said Grossman.

HOURS BILLED

The hours billed by all attorneys in the surveyed firms in the third quarter were down 1.5 percent compared to the same period last year, Grossman said.

However, associates hours on average hit 1,768, an "acceptable level," and were down just 0.5 percent, he said. Hours billed by equity partners, in contrast, dropped 1.7 percent and were lower, at 1,602 hours. Non-equity partners' hours fell 1.6 percent to 1,533, Grossman said.

The fewer hours billed by partners is a sign of a longer-term structural problem, he said. Since the recession, firms have tried to reduce expenses without shedding partners.

"They've cut as much as they can without cutting into muscle."

The Wells Fargo survey found that revenues rose 3 percent compared to this time in 2011, while net income increased by 1.5 percent.

Growth in general expense spending continued to outpace revenue growth at 5.8 percent but slowed from the prior quarter.

The results generally echo those found by the quarterly survey by Citi Private Bank, of 182 law firms, which was published in a Nov. 8 column in The American Lawyer.

Citi found revenues grew 3.7 percent for the third quarter, compared to 4.1 percent in its half-year survey. Revenues overall grew 1.7 percent, Gretta Rusanow, a senior client advisor with the bank's law firm group, said in an email Wednesday.

Wells Fargo said it delayed releasing the results of its survey to give firms affected by Superstorm Sandy more time to respond. Grossman said it was too soon to see if Sandy had any financial impact on law firms, though he expected some of them to take a hit in the short term.

The survey also found wide disparities in performance of law firms nationally. The top 10 highest-profit firms in the survey, mostly in New York, reported profits per partner of more than $2 million, an increase in revenue of 4.9 percent and a jump in net income of 7.9 percent.

Yet if the high-profit firms were excluded, revenues for firms in the Northeast ticked down 2.5 percent and net income slid 9 percent, Grossman said.

"That's the most negatively skewed market," he said. "High profitability firms have benefited from most of the transactional work, and there hasn't been enough to benefit the other firms."

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