Law firm profitability 'dropped markedly' in first quarter amid 12% hike in associate compensation
Law firm profitability decreased in the first quarter of the year, as direct expenses increased 13.1% and overhead increased 9.9% from the same period last year, according to the Thomson Reuters Law Firm Financial Index.
“Law firm profitability dropped markedly as a result of higher expenses, including the increasingly expensive competition for talent,” according to a May 9 Thomson Reuters press release.
Associate compensation in the first quarter increased 12.1% when compared to last year, according to the index, which was released May 9 and relies on data from major law firms. Associate compensation was up an even higher 17.3% for the nation’s 100 top-grossing law firms. Technology spending was also higher, increasing 8%.
Profitability continues to grow “but at levels nowhere near the outsized gains seen in 2021,” said Mike Abbott, head of the Thomson Reuters Institute, in the press release.
Another key takeaway is that work involving mergers and acquisitions showed signs of slowing growth in the first quarter, “a potentially troubling indicator,” according to a separate Thomson Reuters summary and the index report, available here.
The growth in expenses counteracted other positives in the financial measure. Demand for law firm services was up 2.7% since the same quarter last year, while billing rates are also “in positive territory,” according to the report.
The Law Firm Financial Index is a rebranded version of the Peer Monitor Index. Both indexes developed a composite score representing quarterly changes in drivers of law firm profitability.
The index for the first quarter stood at 46, which was the lowest index figure since the third quarter of 2009.
“If these trends continue unabated,” the report said, “law firm profitability growth could mirror the index’s downward plunge.”