Thomson Reuters Law Firm Financial Index: Difficult Decisions Ahead?
Most law firms are operating as if it’s business as usual, yet metrics in the Q3 2022 Law Firm Financial Index (LFFI), “may be a prelude to the difficult decisions law firm leaders will have to make in the coming quarters.” Released today by Thomson Reuters, the LFFI report found law firm profitability continued to drop as firms grappled with a combination of falling demand and surging expenses.
Legal Current shares top takeaways from the Q3 2022 index.
- Law firm profitability fell for the fourth consecutive quarter, and demand was down for the second consecutive quarter. 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 decline was due to 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, dropped 2.0%, while non-transactional practices saw flat growth for the quarter. Rate growth remained strong at 4.8%; however, the report notes that the effects of inflation signify real rate growth is now in negative territory.
- Firms were hit hard by rising expenses. Direct expenses shot up by 10.9% for the quarter. As firms return to the office, overhead expenses are climbing too, growing at 12.8%. The combination of slumping demand and surging expenses reduced profits-per-lawyer by 2.9% in the third quarter, bringing it down to the lowest level since Q1 2021.
- The legal market remains strong. Despite recent declines, profits-per-lawyer remain 17.6% above the levels of pre-pandemic Q1 2020. As Mike Abbott, head of the Thomson Reuters Institute, noted: “While firm profits have slid recently, they still remain well above pre-pandemic levels.”
- Firms are adopting a “wait-it-out” strategy. The report notes firms are continuing with seasonal hiring, avoiding layoffs, and absorbing the costs of taking on more talent and return-to-office expenses. Firm leaders may be recalling the difficulty of rehiring lawyers following widespread layoffs in response to the 2008-2009 financial crisis.
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.