For many American law firms, the second quarter was an abrupt shock to the system. Yet it also provided ample time to chart a path forward, and firms did just that in the third quarter. The decline in demand for law firm services moderated in the third quarter as rates rose and firms took steps to cut costs, mainly by reducing headcount and expenditures.

These are among the findings of the Q3 2020 Thomson Reuters Peer Monitor Economic Index (PMI) report released today. The PMI rose seven points to 58, and the large law firm market recovered some ground.

Law firms have acted swiftly to deal with the challenging business environment brought on by the COVID-19 pandemic. In addition to moving their workforces to work from home, firms are adjusting their business models to adapt to shifts in practice demand, benefitting from strong average worked rates, and reducing costs to boost profitability.

Demand for law firm services fell 2.4%, but it’s a much smaller decline than the 5.9% drop seen in the second quarter. Higher rates have helped cushion some of the impact from the overall weak demand. Average worked rates rose 5.0% during the quarter – a near-record pace.

Firms are actively working to chart a path forward through the current situation and positioning themselves to resume a positive trajectory when conditions improve. They’re clearly making efforts to improve efficiency and flexibility to deal with what’s to come.

In the near term, uncertainty remains. While demand and expenditures are down, the average worked rate in the market has remained well above average. The high average worked rates, combined with significant expenditure reductions, have buoyed profitability metrics.

This means as 2020 – a year where the overall economy will have taken its hardest hit since the great recession – winds down, law firms may find themselves more profitable than ever. The PMI score rising seven points since the second quarter demonstrates that it’s all a matter of perspective; many firms in the industry appear lucratively positioned as yearend approaches.

For more insights, download a copy of the Q3 2020 PMI report here.

This guest post was written by Mike Abbott, vice president of Market Insights and Thought Leadership at Thomson Reuters.

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, visit http://legalsolutions.thomsonreuters.com/law-products/solutions/peer-monitor.