- Analysis of first-quarter results shows improvement after steady declines
- Varied performance between midsize and large firms
May 8 (Reuters) – The law firm financial picture is looking a bit brighter after more than a year of gloom, according to a new analysis of first-quarter economic indicators.
The Thomson Reuters Institute’s Law Firm Financial Index—which tracks key financial metrics across 170 large and midsize law firms—rose 14 points in the first quarter of 2023, representing the first increase since the second quarter of 2021.
Billing rate growth remained healthy for law firms, with rates up nearly 6% over the past year, according to the index. And law firm direct expenses grew more slowly in the first quarter than in the previous year because firms have not raised associate salaries during the previous 12 months.
Practices that typically pick up in a slow economy such as litigation and labor and employment saw increased demand in the first quarter when compared to the last quarter of 2022, according to the index.
And the downturn that hit law firms in 2022 means today’s economic metrics are now compared to times leaner instead of 2021’s record setting profits and spiking demand.
“We knew the pendulum would start to swing back after we set low tide marks the last couple of quarters,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute, which shares the same parent company as Reuters.
The new data shows that challenges remain, however. Profits-per-lawyer decreased 0.6% over the past 12 months—although that’s the smallest decline in more than a year. And the productivity of lawyers fell more than 3% during that time.
The index also notes a divergence between the largest law firms and their midsize counterparts, which are experiencing different strengths and challenges.
Midsize firms saw demand increase by nearly 2% over the past year and they grew their headcount by almost 5% in response, the index found. But that hiring boost increased their direct expenses by more than 8%.
Meanwhile, Am Law 100 firms, the most profitable US law firms, held direct expense growth to less than 5%, but demand for their services declined nearly 2% over the past year, with transactional practices hitting particularly hard. The slowdown in demand was especially steep among the 50 most-profitable law firms, Josten noted.
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