Law firm profitability fell for a fifth consecutive quarter in Q4 2022, according to the Q4 2022 Thomson Reuters Law Firm Financial Index, (LFFI) powered by Financial Insights. The report notes that demand, productivity, and expense challenges “have nearly eaten through the record profit gains of 2021” as firms contend with multiple ongoing issues.

However, the report found some promising signs amid the continued slide. Legal Current shares key takeaways from the report.

  1. Law firms maintained their technology investments. Despite the decline in profits, law firms maintained their level of investment in technology compared to the same period a year earlier. This is particularly notable given findings of the recent 2023 State of the Legal Market Report, which suggested law firms are dealing with a myriad of challenges.
  1. Profits declined in 2022 on an annual basis for the first time since the global financial crisis. Profits per lawyer fell 4.5% in Q4 compared with Q3 when measured on a rolling 12-month basis. Additionally, rate growth moderated to 4.4%, further contributing to the slide in profits.
  2. Demand and productivity fell sharply. Productivity fell 7.2% – the biggest decline since the depths of the pandemic in 2020 – amid a double-whammy of decline in demand and law firms’ strong seasonal hiring. Demand saw a sharp drop of 3.9% compared with a year earlier.
  3. Expense growth showed signs of slowing. While expense growth remained high, it showed signs of slowing. Direct expense growth, measured on a per-lawyer basis, slowed to 5.7%, despite high expenses for onboarding of new talent. Overhead expense growth per lawyer also slowed to 5.8%.
  4. Signs of improvement emerged. In addition to the improvement in expenses, bright spots include that transactional demand, despite recent weakness, still remains above pre-pandemic levels. The report suggests that one of leading indicators for 2023 may be whether macroeconomic conditions, such as inflation, continue to improve, leading to a recovery in demand in transactional practices, which drove much of the growth in 2021.

While ongoing economic instability may threaten these signs of recovery, it’s worth noting the positive signs on the horizon.

The LFFI, produced by Thomson Reuters, is a composite index of law firm market performance using real-time Financial Insights data drawn from major law firms in the United States and key international markets.

Download the full Q4 2022 LFFI report for more insights.

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