The new "2022 Report on the State of the Legal Market" shows that the legal market has remained resilient, even though myriad challenges remain for many law firms
In a seeming repeat of the surprisingly positive results of 2020, the U.S. law firm market finished 2021 on solid economic footing. Despite positive results, however, the growing war for legal talent threatens to upend the legal industry’s newfound momentum, according to the 2022 Report on the State of the Legal Market, issued today by the Center on Ethics and the Legal Profession at Georgetown University Law Center and the Thomson Reuters Institute.
The annual report reviews the performance of U.S. law firms and breaks down the factors that drive the need for firms to take a longer-range, more strategic view of their market positions.
This year’s report shows that demand for legal services soared in 2021 following a disappointing start, driven primarily by real estate and corporate practice areas, both of which not only recovered losses from 2020, but even exceeded their pre-pandemic demand levels. Litigation, however, remains below pre-pandemic levels. To boost profitability, law firms continued to raise their billing rates aggressively last year, which — coupled with rising realization rates — helped to secure another year of strong profits for many law firms.
Talent concerns risk overshadowing gains
While the rising legal demand has been a boon to law firm fortunes, it has also created an increasing appetite for legal talent, which already has begun to collide with lawyers’ evolving work preferences. In response to this new competition for talent, many firms have increased compensation. Indeed, associate compensation alone surged at double-digit levels, driving up overall costs for many law firms.
Yet increasing attorney salaries have not yet stemmed the attrition that many firms are experiencing in their ranks. Attorney turnover has risen to record levels, “edging dangerously close to firms losing one-quarter of their associates in 2021,” the report notes.
About more than money or workload
Reinforcing the idea that increasing compensation has not necessarily stemming the tide of attorney departures, the report analyzed turnover patterns and found that firms with the lowest turnover are not necessarily those with the highest compensation growth. In fact, those law firms that have experienced lower rates of turnover among their attorneys tended to have the lowest compensation growth among firms in the market.
While these initial results may run counter to many previously held notions on the relationship between compensation and retention, as the report concludes, the “loyalty lawyers feel to their firms and their willingness to work hard is not simply, or even primarily, driven by compensation.”
The same trend seemingly applies to workloads as well. Attorneys at the law firms with the lowest turnover billed on average of 51 more hours per year than their counterparts at firms with the highest turnover.
One possible factor influencing these contrary findings is that many lawyers, especially younger ones, may now be giving higher priority to intangible factors, such as feeling appreciated and recognized at work, as well as achieving better work/life balance and mental well-being.
Challenges for firms beyond pay scales
These intangible factors are factoring more heavily into the thinking of law firm leaders as well. The report identifies additional issues that law firms need to tackle, such as hybrid work and operational efficiency.
Even as return-to-office plans remain in flux for many firms, the report notes that there appears to be growing consensus among firm leaders that some mix of in-person and remote work will likely be a fixture of law office life going forward. This shift will also raise the prominence of questions surrounding how to manage key areas, such as the equitable assignment of work, mentoring, evaluations, career advancement, and maintaining firm culture in the hybrid work environment.
Indeed, the report showed that law firms overall showed “surprising agility” during the pandemic in transitioning to remote work. However, firms now need to expand that agile approach into other operational areas such as managing support staff and improving financial practices, including billing and collections, the report notes.
You can download a copy of the 2022 Report on the State of the Legal Market below: