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April 30, 2017

Large law firms improve demand and rates but struggle with collected realization in first quarter, according to Thomson Reuters Peer Monitor Index

Eagan, Minn. The first quarter was generally positive for large law firms, as demand and rates rose. The Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market, rose five points to 53, its highest mark since Q2 2015.

Demand rose 0.3%, but the gain was entirely accounted for by the segment of firms in the Am Law 100, where demand rose 2.1%. Meanwhile, demand declined 0.4% for the Am Law Second Hundred market segment (101-200), and 0.7% for the Midsize segment (large firms outside the Am Law 200).

Worked rates rose 3.0%, one of the strongest quarterly rate growth figures in more than two years. Firms had been struggling with rate growth for several years. However, since bottoming at 2.4% in the fourth quarter of 2015, rate growth has slowly but steadily improved, moving higher in four of the past five quarters, reaching 3.0% in the first quarter. That’s the second-highest mark since Q3 2014, a remarkably swift rebound.

However, much of that improvement is being masked by weak collected realization, and overall pricing power remains weak. While rate growth has been accelerating, collected realization on worked rates had its biggest six-month slide in four years. Over the past two quarters, collected realization has dropped 1.2 percentage points (120 basis points), and now stands at 88.6 percent. So firms, on average, are collecting less than 89 cents on every dollar of work at the negotiated or agreed-upon rates. While firms have been able to push through higher rates, at the same time, they are collecting less when the client invoices come due.

Among practice areas, corporate work was up in the first quarter, boosted by strength in M&A work. IP practices were also stronger. Litigation work, meanwhile, was down in the first quarter, as were labor and employment, and bankruptcy.

“The first quarter was largely positive for US-based large law firms, as demand and rates rose,” said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “Business-related practices such as M&A and IP were particularly strong. At the same time, the recent strength in rates is tempered by weak realization. Even though firms are pushing through higher negotiated rates, they are having difficulty passing on those rate increases when clients receive their invoices.”

A copy of the Q1 2017 PMI report can be downloaded here: http://static.legalsolutions.thomsonreuters.com/static/pdf/PMI_Q1_2017.pdf

The PMI is produced by Thomson Reuters, and is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets. A PMI of 65 or greater indicates strong law firm market performance.

For more information on Peer Monitor, visit http://legalsolutions.thomsonreuters.com/law-products/solutions/peer-monitor

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Thomson Reuters
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