As this year's Thomson Reuters Institute Law Firm COO & CFO Forum begins, the law firm market is seeing a recovery of sorts that isn't lifting all boats equally
WASHINGTON, D.C. — The opening session of the Thomson Reuters Institute’s 22nd annual Law Firm COO & CFO Forum painted this past year as a picture of a bifurcated recovery: While the Am Law 50 has generally made aggressive moves to contract associate headcount; Midsize law firms have, by contrast, sharply grown their associate ranks; and Am Law Second Hundred law firms continued to struggle.
This picture of the legal market — painted by Jim Jones, Senior Fellow with the Center for Ethics and the Legal Profession at the Georgetown University Law Center; and Gretta Rusanow, Head of Advisory Services, Law Firm Group at Citi Global Wealth — became clearer as the session explored key themes and challenges law firm leaders have had to confront this year and those that are likely to continue or arise.
For example, rate growth has been high across the board, and the disturbing inversion of law firm billing rate growth and the pace of inflation in evidence in 2022 and early-2023 has finally reversed. The continued strength of counter-cyclical practices — including litigation, labor & employment, and bankruptcy — has been a key driver of demand growth for many law firms, particularly Midsize firms. And interestingly, both the Am Law 50 and Midsize law firms, despite being at extreme ends of the headcount strategy spectrum, seem to have benefited from market conditions in terms of their overall profitability this year.
Is rate growth driving work away from law firms?
Jones pointed out that corporate general counsel still express a broad desire to bring more work in-house, which, he said, “feeds into the question of whether clients are reacting to rate increases not by pushing back, but instead by simply moving work.” Indeed, the Legal Department Operations Index report, released in mid-September by the Thomson Reuters Institute, posed a similar question in light of overall demand contraction among large law firms, demand growth for Midsize law firms, and overall effective rate favorability for clients.
Corporate GCs still express a broad desire to bring more work in-house, which feeds into the question of whether clients are reacting to rate increases not by pushing back, but instead by simply moving work.
Rusanow was quick to point out that, in her observation of the market, she’s never seen a correlation between rates and a loss of demand for law firms, stating “if law firms have a strong brand, they can command premium rates.” The pair also discussed that, while the data is far from solid, anecdotal indications are that, despite aggressive rate growth, new rate structures coming from law firms are largely holding with minimal loss in realization.
Differing pictures in headcount trends for large firms
Data from Thomson Reuters indicates that Am Law 50 law firms have been aggressively contracting associate headcount, to the point that today’s associate ranks are nearly equal with those of January 2022, despite two years of hiring cycles. In contrast, data from Citi’s survey of large law firms shows total Am Law 50 lawyer headcount actually slightly more than 3% higher than a year ago.
In exploring the discrepancy, Jones and Rusanow acknowledged that it was a bit of an indirect comparison, looking at associate headcount compared to all lawyers. There is also a difference in sampling that could account for much of the difference between the numbers.
However, both agreed that certain trends are absolutely influencing headcount among the largest firms. First, lawyer attrition is down considerably as a tight labor market and uncertain economy has led more lawyers to stay put. And while this year’s incoming associate classes may not be as large as last year’s, they are still strong by historical standards. This is likely attributable to the fact that law firms, when offering employment to incoming associates, must engage in the difficult practice of trying to project associate demand years in advance, a difficult proposition in a volatile market.
Law firms have also reported engaging in more “difficult” performance reviews with associates hired during the 2021 hiring surge, Rusanow noted. Prior to now, law firms have needed the additional capacity, and the lawyers have kept busy. Now that work is slowing, Rusanow explained, and law firms are taking a closer look at lawyer performance.
A look at 2024
The session also offered some suggestions as to what might be on the legal market’s horizon for 2024 and beyond.
Among the key challenges identified, Rusanow discussed that many law firms are concerned about challenges with attracting, retaining, and developing talent. Law firms also anticipate additional challenges from negotiating the evolving hybrid work landscape, managing the increasing costs associated with inflation, and responding to client pricing pressures.
Still, there are also ample opportunities for law firms. Many law firms, for example, are looking to maximize their opportunities from past expansion into selective practice areas through acquisition of key lateral talent, as well as doing more with their existing clients through cross-selling, Rusanow said. The key geographic area for growth appears to be in the United States, although there is optimism for some growth potential in Europe, more specifically London, as well as in Singapore.
On the pricing front, fully 72% of law firms responding to the Citi survey said they expect an increase in the use of alternative fee arrangements (AFAs) by 2025, a finding echoed in the recent LDO Index report in which 54% of corporate GCs said that AFAs will form a significant part of their future cost-control strategies.