Firms face year of 'mixed results and growing uncertainty,' says new report on state of legal market
Amid economic uncertainty, the legal industry will continue to grapple with shrinking demand and productivity and rising expenses and inflation, according to a report published Tuesday.
“We’re still going to end the year with projected profits that, while down from last year, are still pretty healthy on a historical basis,” says James W. Jones, a senior fellow at the Center on Ethics and the Legal Profession at the Georgetown University Law Center and the lead author of the 2023 Report on the State of the Legal Market: Mixed results and growing uncertainty. “But I think going into 2023, the issue is whether what we have is really sustainable, and I think you can make a pretty strong argument it is not.”
The report, released by the Thomson Reuters Institute, drew its data from 170 U.S.-based large and midsize law firms.
In a press release, the institute said respondents “yielded reasonably good financial results” in 2022, however it cautioned that firms face significant obstacles in 2023, including “slowing demand, less client spend optimism, higher expenses, falling productivity, weakening realization and inflation.”
For instance, the report found that profits-per-equity partner are down for the first time since 2009, decreasing by 4.2% in 2022.
Firms must also contend with “stubbornly high” expenses—with direct and overhead expenses driven by increased lawyer head count, according to the report.
That increased head count, along with falling demand for services, has led to record-low productivity. The average lawyer billed $98,000 less in total fees compared to the average lawyer in 2007, based on 2022 rates.
The report suggests that BigLaw firms face the further uncertainty because of falling demand for services, which decreased by an average of 0.1% through 2022—with a precipitous decrease in demand for transactional work, such as mergers and acquisitions.
According to the press release, the demand for BigLaw’s services will “likely finish the year in negative territory, compared with the robust 3.7% rebound in growth for all of 2021.”
Jones says firms may have to think strategically about how some clients could be bypassing bigger firms and taking their business to midsize and boutique firms. The report says midsize firms are competitive in the areas of litigation, labor and employment and intellectual property.
“This is something that we really haven’t been focused on so much,” Jones says. “And if these trends towards [market] segmentation continue, that’s going to be a very important part of everybody’s strategic focus.”
Firms increased rates by 4.8% through November 2022. But inflation and a decrease in collection realization could chip away at those gains. The report suggests that rate growth as related to realization “has begun to level out or decline across all segments of the market,” according to the press release.
“This dip may suggest that firms, in the process of trying to return to ‘business as normal,’ are losing some of the focus on billing and collections they had developed during the pandemic,” according to the report. “But it could also indicate that clients, feeling their own inflationary pressures, may be challenging invoices more frequently and aggressively or simply slowing down their payment cycles. Either way, it is a cause for concern.”
William Josten, a senior manager at the Thomson Reuters Institute, thinks that firms have to look at their workflows and efficiency, rather than focusing on whether to bill clients higher rates.
“It’s going to be vital this year for firms to not let up on the financial hygiene and billing discipline practices they have had in place for the last two-plus years,” Josten says. “The financial discipline that firms have exercised over the last couple of years has unquestionably paid to their benefit.”