February 14, 2022

“Incredibly Strong Demand” Closes Out 2021, But “Year of Talent” Challenges Loom: Thomson Reuters Peer Monitor Index

  • Fifth consecutive quarter of demand growth
  • Associate compensation jumps at double-digit pace, yet turnover remains high
  • “Not a sustainable formula,” the report warns

MINNEAPOLIS-ST. PAUL, February 14, 2022 – After surging back to pre-pandemic levels and beyond, demand for law firm services took yet another jump upwards in the fourth quarter of 2021, according to the Thomson Reuters Peer Monitor Economic Index (PMI).[1] However, challenges stemming from lawyer compensation costs and high turnover continue to rise.

Demand was up a strong 4.2% compared with Q4 2020, driven largely by transactional practices. This marked the fifth consecutive quarter of demand growth. It is particularly noteworthy because Q4 2020 was the first quarter of the legal industry’s recovery from the depths of the pandemic. Even compared to the pre-pandemic Q4 2019, demand was up 3.8% – roughly three times the demand growth that would have been expected based on historical trends prior to the pandemic.

Worked rate growth was up a strong 3.6%, although it has cooled off slightly from earlier in the year. More worrisome, expenses jumped as direct expenses rose a sharp 8.4% and overhead expenses were up 5.8%.

The rise of expenses was enough to offset the growing demand, and as a result, the PMI, a composite index of law firm market performance, dropped nine points to 58 in the fourth quarter.

Talent Wars Heating Up, Costs Rising

“2022 will be the year of talent,” predicts the report, and the effects of the growing talent war were already being felt at the end of 2021. Associate compensation grew at double-digit rates in the fourth quarter – up an average of 11.4% – as firms increased headcount by 3.8%. But the high growth in compensation did little to stem record turnover levels. The report warns, “continued increases in the cost of associates, coupled with fast-paced turnover, is likely not a sustainable formula” for many firms.

“The strong growth seen over the past several quarters is creating a new set of challenges,” said Mike Abbott, vice president, Market Insights and Thought Leadership, Thomson Reuters. “Many firms are scrambling to keep up with surging demand and dealing with dual issues of rising costs and persistent high turnover. While firms are generally finding ways to make it work for now, if these trends continue, eventually something will have to give.”

A copy of the Q4 2021 PMI report can be downloaded at https://www.thomsonreuters.com/en-us/posts/legal/pmi-q4-2021-mere-excellence.

The PMI, produced by Thomson Reuters, 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. For more information on Peer Monitor, part of the Financial Insights platform, visit http://legalsolutions.thomsonreuters.com/law-products/solutions/peer-monitor.

[1] The PMI is a composite index score, representing the quarter-over-quarter change in drivers of law firm profitability, including rates, demand, productivity and expenses. Positive factors driving firm profitability will produce a higher score.

Thomson Reuters

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Jeff McCoy