Law Firms

Small law firms have reason for 'cautious optimism,' new Thomson Reuters report says

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Despite concerns about an economic downturn, many small law firms are bullish about their prospects and expect moderate-to-high growth in the next three years, according to a report published Thursday.

The Thomson Reuters Institute’s report, 2022 State of U.S. Small Law Firms: Cause for cautious optimism, published with the ABA’s Solo, Small Firm and General Practice Division as a branded co-sponsor, surveyed 400 lawyers in small firms, which the report defines as “law practices with 29 or fewer attorneys.”

A press release is here.

“As already nascent changes were catalyzed during 2020 and 2021, this year brought an additional level of complexity with the upheaval of the overall economy. Law firms of all sizes have not been immune. Yet smaller law firms have maintained a bullish outlook on their future prospects, and likely with good reason,” according to the 24-page report.

According to the survey, about more than 60% of lawyers expect their firms to grow in the next year, increasing revenue, billable hours and profits—“representing sizable jumps” in expected financial performance compared to the last time that small firms were surveyed in 2021. Small firms also expect moderate-to-high growth to continue over the next three years.

The news comes after the Thomson Reuters Institute’s Law Firm Financial Index published a far gloomier report Nov. 7 on the state of play for larger firms.

The index suggested that lawyer profitability had trended downward for the third consecutive quarter. Law firm demand also declined by 0.7% in the third quarter of this year, compared to the third quarter of 2021.

“The market is trending in a direction that is more favorable to smaller firms,” William Josten, a senior manager at the Thomson Reuters Institute told the ABA Journal, adding that the index suggests that demand for cost-effective and quality legal services could be an advantage for midsize firms.

The same trend could be giving smaller firms cause for optimism, Josten says.

That’s not to say there aren’t challenges for small shops, according to the latest report published Nov. 10, including the burdens of balancing the administrative side of running a small business with the practice of law.

It adds that the “competitive landscape is shifting, and this provides both new opportunities and rising threats.” Small firms face “two significant competitive forces”—do-it-yourself legal services from below and larger firms from above, according to the report.

The ever-evolving landscape for DIY online solutions for clients, including estate planning and legal services for businesses, is an “existential threat to firms that cannot formulate a plan to compete effectively,” according to the report.

“Such competition—readily accessible via computers and smartphones and viewed by consumers as a less expensive alternative to law firms—is putting the onus on small law firms to improve efficiency and client service,” the report says.

Large firms pose another threat because “competition for the same clients has been creeping upwards over the last few years,” the report says. But it adds that corporate clients may be looking for lower-cost options and funnel work to smaller shops.

“Shifting market dynamics may mean more opportunities for small firms to poach business away from significantly larger firms, even as those larger firms look to outcompete their smaller counterparts. Growing economic concerns, including inflation and economic slowdowns, may induce all types of clients to seek out more cost-effective options for quality legal work,” the report says.

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