Law Firms

Law firms see 'bifurcated recovery' with strengths and challenges varying by firm size

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The nation’s top 100 grossing law firms are experiencing different financial strengths and challenges than midsize firms in a “bifurcated recovery,” according to a Thomson Reuters report released this week.

The Law Firm Financial Index—a composite score of financials driving firm profitability—increased 14 points to a score of 44 in the first quarter of 2023, thanks to the positive but differing financial improvement, according to the report, available with this press May 5 release. The index had reached an all-time low in the last quarter of 2022.

“A combination of historic rate increases, expense growth slowing and the rise of counter-cyclical practice areas helped law firms snap a year-and-a-half streak of decline,” the report said.

The index remains at historically low levels. despite the improvement.

On the bright side for midsize firms:

  • Demand for legal services increased 1.8% in the first quarter of 2023, compared to the last quarter of 2022.
  • Demand increased 4% growth for the counter-cyclical practices of litigation, labor and employment, and bankruptcy. Midsize firms also had “better relative performance” in transactional practices, which are nonetheless contracting overall.

Challenges for midsize firms include:

  • A 4.9% growth in lawyer head count compared to the first quarter of 2022.
  • An 8.3% year-to-year growth in direct expenses, which consist of compensation and benefits for lawyers who are not equity partners.

On the bright side for Am Law 100 firms:

  • The growth in worked rates—the prices clients pay after negotiations—was a record 7.2% since the first quarter of 2022.
  • Head count increased by only 2.8% since the first quarter of 2022.
  • Am Law 100 expenses are “slowing dramatically.” Year-to-year growth in direct expenses stands at only 4.8%.

Challenges for Am Law 100 firms include:

  • Demand for legal services decreased by 1.5% in the first quarter of 2023, compared to the last quarter of 2022.
  • Collection against worked rates has declined more than for other firms.

“This bifurcated recovery, with two ends of the industry experiencing such contrasting revivals, highlights the precarious state of the legal industry as every strength is seemingly accompanied by a drawback,” the report concluded.

Reuters and Legal Dive are among the publications covering the report.

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