Law firm talent war drives firm expenses up 7.2%; will associates be a ‘profit sinkhole’?
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Direct expenses at larger law firms increased 7.2% in the last year, mostly driven by a jump in associate compensation, according to the latest Peer Monitor Index report by Thomson Reuters.
Associate compensation in the third quarter increased 9.9% from this point last year, the report found.
“The increases in salary scale have never been as large or as frequent as they have in 2021,” said the report, available here.
The report says expense increases “dominated much of the story” for the third quarter at law firms, even as firms saw a growth in demand, rates and productivity. The report is based on information from major law firms in the United States and key international markets.
An increase in hiring was a smaller driver in direct expense growth, as the number of full-time equivalent lawyers increased by 2.3%.
But dramatic salary increases have not helped law firms hold on to talent. In the last 12 months, law firms saw a nearly 14% turnover in their lawyer ranks.
The report notes that that associate compensation has long been “a potential profit sinkhole for firms, which spend hundreds of thousands of dollars per associate every year, while many of these associates operate at an effective loss for the year in terms of their collections.”
Further complicating profitability are shifting attitudes in which lawyers want to worker shorter hours, travel less, and be required to bill fewer hours, the report says.
Another complication is the potential threat to head count “posed by burnout and other attorney well-being considerations,” the report says.
The Peer Monitor Index—a measure of law firm market performance—was 67 in the third quarter, down from a record of 84 in the second quarter. Even so, the 67 index score was the third-highest mark in the last decade, according to a Nov. 8 press release.
The report also found:
• Demand for legal services was up 4.4% in the third quarter, compared with the same period a year ago.
• Practice demand was up 13.2% in real estate in the third quarter, compared with the same period a year ago. Practice demand was up 9.2% in mergers and acquisitions, up 8.7% in corporate work, up 4.1% in taxes, up 3.4% in labor and employment, and up 2.9% in litigation. Demand for bankruptcy work was down 12.2%, however.
• Productivity was up 1.9% in the third quarter, compared with the same period a year ago.
• Billing rates increased 3.7% in the third quarter, compared with the same period a year ago.
• Overhead expenses increased 1.1% in the third quarter, compared with the same period a year ago.