November 7, 2022
Law Firm Profitability Continues to Fade: Thomson Reuters Law Firm Financial Index
- Profitability fell for fourth consecutive quarter
- Demand down for second consecutive quarter
- Expenses rose at double-digit rates
MINNEAPOLIS-ST. PAUL, November 7, 2022 – Law firm profitability fell for a fourth consecutive quarter as firms grappled with a combination of falling demand and surging expenses, according to the Q3 2022 Thomson Reuters Law Firm Financial Index (LFFI) powered by Peer Monitor/Financial Insights.
Demand fell 0.7% in the third quarter compared with a year earlier. This follows on the heels of a 0.5% decline in the second quarter of 2022. Most of the Q3 decline was a result of slowing transactional practices, which powered much of the market’s record-setting resurgence in 2021. Transactional practices, which include corporate, tax, and real estate work, saw demand drop 2.0% on average, while non-transactional practices saw flat growth for the quarter. Labor & employment was among the few practice areas that grew during the quarter, rising 0.3%.
At the same time, firms were hit hard by rising expenses. Direct expenses grew by 10.9%, while overhead expenses rose even faster at 12.8%.
Rate growth remained strong at 4.8%; however, the report notes that the effects of inflation signify real rate growth is in negative territory.
The combination of slumping demand and surging expenses reduced profits-per-lawyer by 2.9% compared with the second quarter, bringing it down to the lowest level since Q1 2021. However, even after the recent declines, profits-per-lawyer remain 17.6% above the levels of pre-pandemic Q1 2020.
The report suggests that firms are adopting a “wait-it-out” strategy, continuing seasonal hiring, avoiding layoffs, and absorbing the costs of taking on more talent and return-to-office expenses. Firms may be recalling the difficulty of rehiring lawyers following widespread layoffs in response to the 2008-2009 financial crisis.
“Law firms are finding themselves squeezed by both slowing demand and rising expenses,” said Mike Abbott, head of the Thomson Reuters Institute. “While firm profits have slid recently, they still remain well above pre-pandemic levels. The lessons from the Great Recession are still on the minds of law firm leaders, and they recognize the importance of taking a long-term view on how to best position their firms for ongoing success. But doing so may present some near-term challenges.”
Download a copy of the Q3 2022 LFFI report here.
The LFFI, 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 the LFFI, part of the Thomson Reuters Financial Insights platform, visit legal.thomsonreuters.com/en/products/strategic-insights.
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