In the latest "Report on the State of the US Legal Market", we look at the current tumultuous environment for the legal industry and what law firm leaders can do to best navigate through it
The legal industry may be in a greater state of transition today than at any time since the end of the Great Financial Crisis of 2008-’11 (GFC), as the market shifts dramatically in what types of legal services are most in demand, how differing segments of law firms are addressing these challenges in varying ways, and what will be the ultimate impact of generative artificial intelligence (Gen AI) on the legal profession.
The new 2024 Report on the State of the US Legal Market, published by the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Institute, addresses this tumultuous environment and highlights the fundamental shifts in the legal marketplace that have taken place over the past 15 years.
Indeed, the report offers up the example of Pan Am Airways, the one-time airline industry leader which fell into financial and operational dissolution when its management misjudged the travel marketplace and failed to adapt to change. Emphasizing how law firm leaders who fail to respond to marketplace changes and pivot quickly enough to prepare for the future may see their firms destined for the same fate as Pan Am, the new report discusses the dramatic shift from what it dubs the Transactional Decade of the 2010s — a period marked by easy-to-borrow money and strong performance for law firms’ transactional practices — to the more recent period in which the majority of growth in demand for law firm services has relied on counter-cyclical practices like litigation, bankruptcy, and labor & employment, which tend to run counter to general economic conditions.
Law firm leaders who fail to respond to marketplace changes and pivot quickly enough to prepare for the future may see their firms destined for the same fate as Pan Am.
The report also discusses the rapid increase in the pace of law firm rate growth, particularly over the past few years. In 2023, the rates clients agreed to pay law firms for new work matters grew by more than 6%, with every segment of law firms seeing aggressive increases in worked rates on par with the pace seen prior to the GFC. At the same time, however, many law firms have seen their realization — their ability to collect on those increasing rates — falter; while simultaneously, clients have become more aggressive about trying to move their work to lower-cost firms as a way to control their own costs.
Other key findings in this year’s report include:
- different segments of law firms have taken drastically different approaches to staffing strategies, with the largest law firms actively cutting back on associate headcount as Midsize law firms have grown associate ranks aggressively;
- expenses have moderated somewhat compared to 2022, but the general picture for expenses remains unclear due to persistent high growth in overhead expenses and a resurgence in direct expense growth due to new increases in salary and associate hiring trends;
- sagging productivity and declining realization have combined to put a pinch on law firm profitability growth such that even the high pace of rate growth has been largely unable to remedy the situation; and
- corporate clients seem to be reverting to prior preferences for specialist knowledge, responsiveness, and global coverage when selecting their outside counsel.
And it’s no surprise, of course, that the growing potential impact of Gen AI also factors heavily into any vision of what lies in store for the legal industry in 2024 and beyond. As our own research has shown, lawyers appear to be optimistic about the potential that Gen AI offers for the future of the legal profession, but some natural skepticism remains. The report also lays out three potential scenarios that may befall the legal industry as Gen AI evolves more fully, each scenario carrying varying degrees of impact — and the potential need to change — around how law firms serve their clients and the ultimate benefit this innovative technology could bring to the legal industry.
You can download a copy of the “2024 Report on the State of the US Legal Market” by filling out the form below: