Law firm profitability continues to slide due to an inevitable cooling off in demand and a rebound in expenses, according to findings of the Q2 2022 Law Firm Financial Index, released today by Thomson Reuters. Powered by Peer Monitor/Financial Insights, the index fell for a fourth consecutive quarter – the longest such slide in its history.

Legal Current shares three takeaways from the Q2 2022 index.

  1. Rate growth remains robust. Rates and realization continue to be strong, which helps support firm profitability. Yet they’re not enough to offset expenses growing at a double-digit pace.
  2. Demand is declining as expenses soar. Demand for law firm services slipped 0.5% compared with a year ago as corporate work, which drove much of the growth seen in 2021, fell 0.7%. The decline was even more pronounced for corporate mergers and acquisitions work, which dropped 4.9%. Meanwhile, expenses surged due to a combination of inflation, competition for talent, and firms moving to hybrid or in-office working arrangements. Direct expenses rose 12.4%, and associate compensation, especially for Am Law 100 firms, was the principal driver. Overhead expenses grew 13.5% as firms restored more staff functions, such as recruiting and business development, that were cut during the depths of the pandemic.
  3. Firms are investing heavily in technology. Technology spending grew at its fastest pace in eight years, with growth averaging 10.5%. The report notes the growth “suggests that firms are not simply spending more due to inflation, but that they are making longer-term investments.”

The report concludes, “having hit its lowest all-time score, [the index] serves to warn firms that they must keep a tight grip on the steering wheel now as future revenue tries to measure up against a spectacular second half of 2021.”

Produced by Thomson Reuters, the Law Firm Financial Index 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 insights, download the report.