The large law firm market continues its strong recovery – with high marks for demand, rates, and productivity – but the intensifying war for talent is a growing drag on law firm performance, according to the Thomson Reuters Peer Monitor Economic Index (PMI), released today. The third-quarter 2021 PMI, a composite index of law firm market performance, stood at 67 – the third-highest mark in the last decade – after reaching a record high of 84 in the second quarter.

Demand was up a strong 4.4% compared with the same period a year ago, with growth across nearly all major practice areas, led by real estate, which was up 13.2%. Corporate work continued to be strong, especially M&A work. Litigation was up 2.9% but is one of the few practices that still has not returned to pre-pandemic levels.

While worked rate growth has cooled off slightly, it remained a healthy 3.7% in the third quarter.

But the many positives could potentially be outweighed going forward by the escalating war for talent. Direct expenses surged 7.2%, driven primarily by spikes in associate compensation. The report notes, “the increases in salary scale have never been as large or as frequent as they have in 2021.” Even with the rising salaries, firms are having difficulty holding on to talent. Firms have seen their attorney ranks turnover by an average of 14% over the last 12 months.

“Law firms continue to make strong progress in resuming growth but new challenges are arising,” said Mike Abbott, vice president, Market Insights and Thought Leadership, Thomson Reuters. “Global competition for talent is becoming a key factor, not only with increasing salaries and recruiting costs, but also because lawyers want more flexible working arrangements, to avoid burnout, and additional well-being considerations. All of these are areas where firms are increasingly focusing their attention and resources.”

Download the Q3 2021 PMI report here, and learn more about Peer Monitor here.