Lawyer profits at major firms slide with big drop in productivity in fourth quarter of 2022, new report says
Law firm productivity in the fourth quarter of 2022 decreased 7.2% since the same period in 2021, a decline “equal to the depths of the pandemic lockdown,” according to a report released Tuesday.
The decrease was due to declining demand and continued hiring, according to the Thomson Reuters Law Firm Financial Index report, available here.
“Continued hiring throughout 2022 brought in a fresh class of associates at a time when many law firms were already having difficulties keeping their current lawyers busy,” according to a summary of the report.
The financial troubles led to a decrease of 4.5% in fourth-quarter profits per lawyer compared to the same period in 2021.
Other year-over-year financial findings for the fourth quarter:
• Demand decreased 3.9%
• Rates increased 4.4%
• Direct expenses increased 8.4%
• Overhead expenses increased 9.3%
The poor financial showing sent the Thomson Reuters Law Firm Financial Index to its lowest point since its creation in 2006. The index is a composite score of firm profitability based on financial data from major firms in the United States and key international markets.
The report summary noted that the final quarter of 2021 was one of the busiest for firms, “with a glut of transactional demand lifting the large law firm industry into record profitability.” Measuring firms “current valley against this peak” sent the index to its new all-time low score of 30 for the fourth quarter of 2022.
“Combined challenges to revenues, productivity and expenses have nearly eaten through the record profit gains of 2021,” according to the report.
On a positive note, the report summary said, the legal industry “may have hit bottom and could see a turnaround this year.”
According to the report summary, the average lawyer is still more profitable than before the pandemic, demand for nontransactional work is “on the mend,” expense growth is showing a slowdown in several categories, overall demand “remains even with prepandemic levels,” and firms are gearing up for rate increases.
“Recovery from the top of the market, slowing expense growth, and another series of rate increases may be enough to pull the [index’ out of its tailspin and send it back into normal territory,” the report summary said.
ABAJournal.com: “Firms face year of ‘mixed results and growing uncertainty,’ says new report on state of legal market”